The management of Kunkel Company is considering the purchase of a $36,000 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%. Determine the net present value of the investment in the machine. (Any cash outflows should be indicated by a minus sign. Round answers to the nearest dollar.)

This is an investment appraisal question. NPV technique is one of the most used methods in investment appraisal for appraising projects and investments. The formula for NPV is:

NPV = -pv of cash outflow - pv of cash inflow

In the question cash outflow is purchase price paid for machine worth $-36000 and cash inflows are the savings made each year in terms of reduced operating costs as a result of the investment in machine. The PV (present value) represents the value of future cash flow in today's terms.

PV of cash outflow= $36000

Because the cost of machine is already expressed in today's terms. The PV of cash inflow needs to be computed using the discounting approach. Before discounting the cash inflows need to be accumulated for five years (i.e $8500×5= $42500).

Formula for discount factor = 1 ÷(1+r)*n

DF= 1÷(1.13)*5

DF= 0.54276

PV of cash inflow= 42500×0.54276

PV of cash inflow= 23067

Now lets compute NPV of the investment in machine.

NPV = -$36000+23067

NPV = -$12932.7

The NPV of the investment is negative. From NPV point of view the investment is not worthwhile and should't be accepted.

divyamadaan8054 divyamadaan8054 · Answer 2 · 2022-03-23T09:32:36+01:00

According to above excerpt, the Net present value of the investment in the machine is $12932.7.

What is the term Net Present Value about?

NPV technique is one of the most used methods in investment appraisal for appraising projects and investments. NPV is calculated by subtracting cash inflow from cash outflow.

Given Information:

PV of cash outflow= $36000

Operating cost reduced by=$8,500

Required rate of return=13%

Likewise, before discounting the cash inflows need to be accumulated for five years (i.e $8500×5= $42500).

Formula for discount factor = 1 ÷(1+r)*n

Discount Factor= 1÷(1.13)*5

Discount Factor= 0.54276

Present Value of cash inflow= 42500×0.54276

Present Value of cash inflow= 23067

Now, lets compute NPV of the investment in machine.

NPV = -$36000+23067

NPV = -$12932.7

The NPV of the investment is negative. From NPV point of view the investment is not worthwhile and shouldn't be accepted.

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