Exercise 11-2 Net Present Value Method [LO11-2]

The management of Kunkel Company is considering the purchase of a $44,000 machine that would reduce operating costs by $10,000 per year. At the end of the machines five-year useful life, it will have zero scrap value. The companys required rate of return is 11%.

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

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.)