The management of Kunkel Company is considering the purchase of a $31,000 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 13%.
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?
Net Present Value Method:
The net present value of an investment or project represents the change in the net wealth of the investors if the project is executed. The calculation of the net present value involves discounting of the prospective cash flows by a discount rate which represents the opportunity cost or the cost of capital.
Answer and Explanation: 1
Answer to 1
The net present value of the investment in the machine can be ascertained by deducting the initial purchase cost from the sum of present...
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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.