{"id":191531,"date":"2025-02-15T07:49:31","date_gmt":"2025-02-15T07:49:31","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=191531"},"modified":"2025-02-15T07:49:33","modified_gmt":"2025-02-15T07:49:33","slug":"the-management-of-kunkel-company-is-considering-the-purchase-of-a-34000-machine-that-would-reduce-operating-costs-by-9000-per-year","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/02\/15\/the-management-of-kunkel-company-is-considering-the-purchase-of-a-34000-machine-that-would-reduce-operating-costs-by-9000-per-year\/","title":{"rendered":"The management of Kunkel Company is considering the purchase of a $34,000 machine that would reduce operating costs by $9,000 per year"},"content":{"rendered":"\n

The management of Kunkel Company is considering the purchase of a $34,000 machine that would reduce operating costs by $9,000 per year. At the end of the machine\u2019s five-year useful life, it will have zero scrap value. The company\u2019s required rate of return is 12%.<\/p>\n\n\n\n

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.<\/p>\n\n\n\n

Required:<\/p>\n\n\n\n

    \n
  1. Determine the net present value of the investment in the machine.<\/li>\n<\/ol>\n\n\n\n

    Net present Value<\/p>\n\n\n\n

      \n
    1. 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.)<\/li>\n<\/ol>\n\n\n\n

      Item Cahs Flow Years Total Cash Flows
      Annual Cost Savings $900 5 $45,000
      Inital investment 1
      Net Cash Flow<\/p>\n\n\n\n

      The Correct Answer and Explanation is :<\/strong><\/mark><\/p>\n\n\n\n

      Answers:<\/h3>\n\n\n\n
        \n
      1. Net Present Value (NPV):<\/strong>
        The net present value (NPV) of the investment in the machine is approximately -$1,557.01<\/strong>. This means that, considering the company’s required rate of return of 12%, the purchase of the machine will result in a net loss of around $1,557.01 over its 5-year life.<\/li>\n\n\n\n
      2. Difference Between Total Cash Inflows and Outflows:<\/strong><\/li>\n<\/ol>\n\n\n\n
          \n
        • Total Cash Inflows:<\/strong> The machine generates $9,000 in annual savings for 5 years, leading to total cash inflows of $45,000<\/strong>.<\/li>\n\n\n\n
        • Total Cash Outflows:<\/strong> The initial investment cost of the machine is -$34,000<\/strong>.<\/li>\n\n\n\n
        • Net Cash Flow Difference:<\/strong> The difference between total cash inflows and outflows is $11,000<\/strong>. This is the simple difference before accounting for the time value of money.<\/li>\n<\/ul>\n\n\n\n

          Explanation:<\/h3>\n\n\n\n

          The NPV calculation takes into account the time value of money by discounting future cash inflows. The annual cost savings of $9,000 are expected for five years, but when discounted at the required rate of return (12%), their present value is lower than the initial investment of $34,000, leading to a negative NPV of about $1,557. This negative NPV suggests that, under these conditions, the investment would not generate enough value to meet the company’s required rate of return.<\/p>\n\n\n\n

          The simple cash flow differenc<\/p>\n\n\n\n

          \"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"

          The management of Kunkel Company is considering the purchase of a $34,000 machine that would reduce operating costs by $9,000 per year. At the end of the machine\u2019s five-year useful life, it will have zero scrap value. The company\u2019s required rate of return is 12%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-191531","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/191531","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=191531"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/191531\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=191531"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=191531"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=191531"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}