The management of Kunkel Company is considering the purchase of a $25,000 machine that would reduce operating costs by $6,000 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 11%.
| 1. | Determine the net present value of the investment in the machine. |
Answer: NPV = $ 383.23
Working notes for the above answer is as under
We have been provided with the information as follow
Kunkel Company is considering the purchase of a $25,000 machine
that would reduce operating costs by $6,000 per year. So every year cash flow = $ 6,000
machine’ have five-year useful life,
it will have zero scrap value.
The company’s required rate of return is 11%.
Now we will find NPV as under
| Year | Cash Flow |
PV Factor @11% |
Present Value |
| 0 | -25000 | 1 | -25000 |
| 1 | 6000 | 0.9009 | 5405.41 |
| 2 | 6000 | 0.8116 | 4869.73 |
| 3 | 6000 | 0.7312 | 4387.15 |
| 4 | 6000 | 0.6587 | 3952.39 |
| 5 | 6000 | 0.5935 | 3560.71 |
| 6 | 6000 | 0.5346 | 3207.85 |
| 383.23 |
NPV = $ 383.23
