Question

The management of Kunkel Company is considering the purchase of a $37,000 machine that would reduce operating costs by $8,000 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%.

Determine the net present value of the investment in the machine.

Answer 1

Answer:

-$8,162

Explanation:

The computation of the net present value is shown below:  

Net present value = Present value after considering the discounting factor - initial investment

where,  

Present value = Annual cash flows × PVIFA factor for 12% at 5 years  

= $8,000 × 3.6048

= $28,838.40

So, the present value is  

= $28,838.40 - $37,000

= -$8,162

Refer to the PVIFA table