# The management of Kunkel Company is considering the purchase of a \$40,000 machine that would reduce.

The management of Kunkel Company is considering the purchase of a \$40,000 machine that would reduce operating costs by \$7,000 per year. At the end of the machine’s eight-year useful life, it will have zero scrap value. The company’s required rate of return is 12%. (Ignore income taxes.) To determine the appropriate discount factor(s) using tables, click here to view Exhibit 13B-1 and Exhibit 13B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem. Requirement 1: Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Omit the “\$” sign in your response.) Net present value \$ Requirement 2: What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Omit the “\$” sign in your response.) Net cash flow \$ Internal Rate of Return [LO2]
Net Present Value Method [LO1]

 The management of Kunkel Company is considering the purchase of a \$40,000 machine that would reduce operating costs by \$7,000 per year. At the end of the machine’s eight-year useful life, it will have zero scrap value. The company’s required rate of return is 12%. (Ignore income taxes.)

 To determine the appropriate discount factor(s) using tables, click here to view Exhibit 13B-1 and Exhibit 13B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.

 Requirement 1:

 Determine the net present value of the investment in the machine. (Negative amount should be indicated by a minus sign. Omit the “\$” sign in your response.)

 Net present value \$

 Requirement 2:

 What is the difference between the total, undiscounted cash inflows and cash outflows over the entire life of the machine? (Omit the “\$” sign in your response.)

 Net cash flow \$

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Internal Rate of Return [LO2]
[The following information applies to the questions displayed below.]

 Wendell’s Donut Shoppe is investigating the purchase of a new \$18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at a cost savings of \$3,800 per year. In addition, the new machine would allow the company to produce one new style of donut, resulting in the sale of 1,000 dozen more donuts each year. The company realizes a contribution margin of \$1.20 per dozen donuts sold. The new machine would have a six-year useful life. (Ignore income taxes.)

 To determine the appropriate discount factor(s) using tables, click here to view Exhibit 13B-1 and Exhibit 13B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.

2.

 Requirement 1:

 What would be the total annual cash inflows associated with the new machine for capital budgeting purposes? (Omit the “\$” sign in your response.)

 Total annual cash inflows \$

3.

 Requirement 2:

 Internal rate of return %

 Requirement 3:

 In addition to the data given previously, assume that the machine will have a \$9,125 salvage value at the end of six years. Under these conditions, compute the internal rate of return. (Hint: You may find it helpful to use the trial-and-error process; find the discount rate that will cause the net present value to be closest to zero.) (Round your answer to the nearest whole percent. Omit the “%” sign in your response.)

 Internal rate of return %

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Preference Ranking [LO4]
[The following information applies to the questions displayed below.]

 Information on four investment proposals is given below:

 Investment Proposal A B C D Investment required \$(90,000) \$(100,000) \$(70,000) \$(120,000) Present value of cash inflows 126,000 138,000 105,000 160,000 Net present value \$36,000 \$38,000 \$35,000 \$40,000 Life of the project 5 years 7 years 6 years 6 years

references

5.

 Requirement 1:

 Compute the project profitability index for each investment proposal. (Round your answers to 2 decimal places.)

 Proposal Number Project Profitability Index A B C D

6.

 Requirement 2:

 Rank the proposals in terms of preference.

 D C B A C A B D A B C D B C A D

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Payback Method [LO5]
[The following information applies to the questions displayed below.]

 The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:

 Year Investment Cash Inflow 1 \$15,000 \$1,000 2 \$8,000 \$2,000 3 \$2,500 4 \$4,000 5 \$5,000 6 \$6,000 7 \$5,000 8 \$4,000 9 \$3,000 10 \$2,000

7.

 Requirement 1:

 Determine the payback period of the investment. (Round your answer to 1 decimal place.)

 Payback period years

8.

 Requirement 2:

 Would the payback period be affected if the cash inflow in the last year were several times as large?

 Yes No

9.
Simple Rate of Return Method [LO6]

 The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for \$120,000. The machine would replace an old piece of equipment that costs \$30,000 per year to operate. The new machine would cost \$12,000 per year to operate. The old machine currently in use could be sold now for a scrap value of \$40,000. The new machine would have a useful life of 10 years with no salvage value.

 Required:

 Simple rate of return %

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