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 scrap value. The company�s required rate of return is 12%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.
Required:
1. Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)
2. What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Any cash outflows should be indicated by a minus sign.)

A strategy used by businesses to assess the value of a project is capital budgeting. The profitability of the potential project or investment is evaluated using this method. It assesses the risks and potential returns of the investment. In capital budgeting, there are several approaches to evaluating a project. Internal rate of return, payback time, and net present value are a few of the techniques.

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)

The investment in the machine has a net present value of (-1,767).

The device would save operating costs by $7,000 per year, based on the information in the question; as a result, it generates an annual cash inflow. The cash flows are multiplied by the value in accordance with the designated discounting factor for each phase of the machine's life. The net present value of the machine is ($1,767), which is a negative amount. The machine investment plan ought to be rejected as a result.

2) Calculate the difference between undiscounted cash inflows and outflows over the machine's lifetime as follows:

Difference = Undiscounted Cash Inflows - Undiscounted Cash Outflows

Difference = $35000 - $27000

Therefore, the difference = $8,000

The undiscounted cash inflows are calculated as follows:

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

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

As a result, there will be an $8 000 difference between undiscounted cash inflows and outflows over the period of the machine's lifetime.

The undiscounted cash inflow is calculated by multiplying the period of cash inflows by the cash inflow for each period. The machine's acquisition price, or the undiscounted cash outflow, has been fixed at $27,000. The difference between the two is calculated by taking the cash outflow and subtracting it from the undiscounted cash inflows.

To know more about Capital Budgeting, refer to this link:

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