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 1 year ago

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