The management of Kunkel Company is considering the purchase of a $26,000 machine that would reduce operating costs by $6,500 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 16%.

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.

Net present value _________

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.)

CashFlowYearsTotal cash flow

Annual cost savings

Initial investment

Net cash flow

The management of Ballard MicroBrew is considering the purchase of an automated bottling machine for $60,000. The machine would replace an old piece of equipment that costs $15,000 per year to operate. The new machine would cost $6,000 per year to operate. The old machine currently in use is fully depreciated and could be sold now for a scrap value of $20,000. The new machine would have a useful life of 10 years with no salvage value.

Required:

Compute the simple rate of return on the new automated bottling machine.

SIMPLE RATE RETURN

Choose NumeratorChoose Denominator =Simple rate return

[]/[] =Simple rate return

[]/[] =__________%