The management of Kunkel Company is considering the purchase

The management of Kunkel Company is considering the purchase of a $35,000 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 16%.

    

Determine the net present value of the investment in the machine.

The management of Kunkel Company is considering the purchase of a $35,000 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 16%.

1. Show formula inputs and calculations for Present Value of the Cash Inflows: Item Amount PV of Cash Inflows 2. Show calculations for Net Present Value: Item Amount Net Present Value:

Solution

1. CALCULATION OF PRESENT VALUE Item Amount Cash inflows / Reduction in costs A 8500 Period - years B 5 Required rate of return C 16% Present value of annuity @16% for 5 years D 3.2743 Present value of cash flows (A X D) E 27832 2. CALCULATION OF NET PRESENT VALUE Present value of cash flows A 27832 Less: cost of machine B 35000 Net persent value (A - B) C -7168 Future cash received per year Present value of cash flows Annual cash inflows/ Reduced costs 8500 27832