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 zero salvage value. the company’s required rate of return is 12%.
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?

Capital budgeting is a method by which a business determines whether a project is worthwhile. This method assesses the prospective project or investment's profitability. It evaluates the investment's potential profits and hazards. There are various ways to evaluate a project in capital budgeting. Some of the methods include internal rate of return, payback period, and net present value.

1. Calculation of the net present value of the investment:

Year Cash Flows Present Value Present Value

Factor (12%)

(a) (b) (c) (b * c)

0 (-$27000) 1 (-$27000)

1 $7000 0.8929 $6250

2 $7000 0.7972 $5580

3 $7000 0.7118 $4982

4 $7000 0.6355 $4449

5 $7000 0.5674 $3972

NET PRESENT VALUE (-$1767)

As a result, the machine's investment has a net present value of (-1,767).

According to the information provided in the question, the device would save running expenses by $7,000 a year; as a result, it creates an annual cash inflow. The cash flows for each period of the machine's life are multiplied by the value according to the specified discounting factor. The machine's net present value is ($1,767), which is a negative number. As a result, the machine investment plan shouldn't be approved.

2) Over the course of the machine's lifetime, determine the difference between undiscounted cash inflows and cash outflows as follows:

Difference = Undiscounted Cash Inflows - Undiscounted Cash Outflows

Difference = $35000 - $27000

Therefore, the difference = $8,000

Calculation of the undiscounted cash inflows:

Undiscounted Cash Inflows = Cash Inflow during each year * Number of periods (years) of cash inflow

Undiscounted Cash Inflows = 7000 * 5 = $35,000

Therefore, during the course of the machine's lifetime, there will be an $8 000 discrepancy between undiscounted cash inflows and cash outflows.

The period of cash inflows and the cash inflow for each period are multiplied to determine the undiscounted cash inflow. The undiscounted cash outflow, or the machine's acquisition price, has been set at $27,000. By subtracting the cash outflow from the undiscounted cash inflows, the difference between the two is computed.

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