Exercise 11-2 Net Present Value Method [LO11-2] The management of Kunkel Company is considering the purchase...

Exercise 11-2 Net Present Value Method [LO11-2]

The management of Kunkel Company is considering the purchase of a $25,000 machine that would reduce operating costs by $6,000 per year. At the end of the machine’s five-year useful life, it will have zero scrap value. The company’s required rate of return is 11%.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Required:
1.	Determine the net present value of the investment in the machine.

2.	What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.)

Expert Solution

Statement showing Cash flows
Particulars	Time	PVf 11%	Amount	PV
Cash Outflows	-	1.00	(25,000.00)	(25,000.00)
PV of Cash outflows = PVCO				(25,000.00)
Cash inflows	1.00	0.9009	6,000.00	5,405.41
Cash inflows	2.00	0.8116	6,000.00	4,869.73
Cash inflows	3.00	0.7312	6,000.00	4,387.15
Cash inflows	4.00	0.6587	6,000.00	3,952.39
Cash inflows	5.00	0.5935	6,000.00	3,560.71
PV of Cash Inflows =PVCI				22,175.38
NPV= PVCI - PVCO				(2,824.62)

2)
Value of total, undiscounted cash inflows	30,000.00
cash outflows	(25,000.00)
Difference	5,000.00

ekkarill92 answered 2 years ago

Exercise 11-7 Net Present Value Analysis and Simple Rate of Return [LO11-2, LO11-4] Derrick Iverson is...

Exercise 11-7 Net Present Value Analysis and Simple Rate of Return [LO11-2, LO11-4] Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 20% each of the last three years. Derrick is considering a capital budgeting project that would require a $4,200,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 18%. The...

Exercise 11-11 Comparison of Projects Using Net Present Value [LO11-2] Labeau Products, Ltd., of Perth, Australia,...

Exercise 11-11 Comparison of Projects Using Net Present Value [LO11-2] Labeau Products, Ltd., of Perth, Australia, has $28,000 to invest. The company is trying to decide between two alternative uses for the funds as follows: Invest in Project X Invest in Project Y Investment required $ 28,000 $ 28,000 Annual cash inflows $ 8,000 Single cash inflow at the end of 6 years $ 65,000 Life of the project 6 years 6 years The company’s discount...

Net Present Value Method for a Service Company AM Express Inc. is considering the purchase of...

Net Present Value Method for a Service Company AM Express Inc. is considering the purchase of an additional delivery vehicle for $27,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $5,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $52,000 per year for each of the next five years. A driver will cost $37,000 in 20Y1, with an...

Problem 11-14A Net Present Value Analysis [LO11-2] Oakmont Company has an opportunity to manufacture and sell...

Problem 11-14A Net Present Value Analysis [LO11-2] Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 17%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 165,000 Working capital needed $ 67,000 Overhaul of the equipment in two years $ 10,000 Salvage value of the equipment in four years $ 13,000 Annual revenues and costs: Sales revenues...

Exercise 11-1 Payback Method [LO11-1] The management of Unter Corporation, an architectural design firm, is considering...

Exercise 11-1 Payback Method [LO11-1] The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $52,000 $4,000 2 $6,000 $8,000 3 $16,000 4 $17,000 5 $20,000 6 $18,000 7 $16,000 8 $14,000 9 $13,000 10 $13,000 Required: 1. Determine the payback period of the investment. (Round your answer to 1 decimal place.) ...

The management of Kunkel Company is considering the purchase of a $42,000 machine that would reduce...

The management of Kunkel Company is considering the purchase of a $42,000 machine that would reduce operating costs by $9,500 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 11%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference...

The management of Kunkel Company is considering the purchase of a $31,000 machine that would reduce...

The management of Kunkel Company is considering the purchase of a $31,000 machine that would reduce operating costs by $8,500 per year. At the end of the machine’s five-year useful life, it will have zero scrap value. The company’s required rate of return is 13%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Determine the net present value of the investment in the machine. 2. What is...

The management of Kunkel Company is considering the purchase of a $30,000 machine that would reduce...

The management of Kunkel Company is considering the purchase of a $30,000 machine that would reduce operating costs by $6,500 per year. At the end of the machine’s five-year useful life, it will have zero salvage value. The company’s required rate of return is 12%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using table. Required: 1. Determine the net present value of the investment in the machine. 2. What is the difference...

Net Present Value Method and Present Value Index MVP Sports Equipment Company is considering an investment...

Net Present Value Method and Present Value Index MVP Sports Equipment Company is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 150 baseballs per hour to sewing 270 per hour. The contribution margin is $0.52 per baseball. Assume that any increased production of baseballs can be sold. The second machine is an automatic packing machine for the golf ball line. The packing machine will reduce packing labor cost. The labor cost saved...

Larry company is considering the purchase of an investment that has a positive net present value...

Larry company is considering the purchase of an investment that has a positive net present value based on a discount rate of 12%. The internal rate of return would be: a. zero b. 12% c. greater than 12% d. Less than 12%?

Question