The management of Kunkel Company is considering the purchase of a $26,000 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 scrap value. The company's required rate of return is 16%.
1. Determine the net present value of the investment in the machine.
2. What is the difference between the total, un-discounted cash inflows and cash outflows over the entire life of the machine?
The present value of money is the translation of the future value of money into the present time. It is determined by assuming that the money is deposited in a bank account and the balance grows as it earns interest. Calculating the present value of prospective projects presents the net worth of investments with different duration. Thus, management can compare investment alternatives and reach a decision based on current conditions.
Answer and Explanation: 1
Net present value of the investment in the machine: −$4,717
It is best to calculate the net present value in a tabular format....
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fromChapter 5 / Lesson 20
Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.