The management of Kunkel Company is considering the purchase of a $27,000 machine that would...
Question:
The management of Kunkel Company is considering the purchase of a $27,000 machine that would reduce operating costs by $7,000 per year.
At the end of the machine's five-year useful life, it will have no scrap value.
The company's required rate of return is 12%.
Required:
Determine the net present value of the investment in the machine.
Net Present Value:
Net Present Value (NPV) is calculated using the following Excel Formula: =PV (rate, nper, pmt, (fv), (type)), where:
- Rate = discount rate
- Nper = Number of periods
- Pmt = Payment
- fv = Future value
- Type = Whether payments are at the beginning or end of the period.
Answer and Explanation: 1
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View this answerLet's determine our variables:
=PV(rate, nper, pmt, fv, type)
- Rate = discount rate
- 12%
- Nper = Number of periods
- 5 years
- Pmt = Payment
- $7,000 savings...
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Evaluating a Budget Using the Net Present Value Method
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The net present value (NPV) method considered future cash flows to evaluate the value of capital projects—those that increase or decrease an enterprise's value. Learn how this method is calculated and guides budget decisions.
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