Question

The management of Kunkel Company is considering the purchase of a $40,000 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 13%.
Required:

a. Determine the net present value of the investment in the machine.
b. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine?

Answer 1

Answer:

NPV =$ -6,586.30

$7,500

Explanation:

The net present value is the present value of after tax cash flows from an investment less the amount invested.

The net present value can be calculated using a financial calculator.

Cash flow in year zero = -40,000 

Cash flow each year from year one to five = 9,500

1 = 13%

NPV =$ -6,586.30

b. ($9500×5) - $40,000 = $47,500 - $40,000 = $7,500

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you