The management of Kunkel Company is considering the purchase of a $28,000 machine that would reduce operating costs by $7,000 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 13%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using table.

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).)

	Now	1	2	3	4	5
Purchase of machine
Reduced operating costs
Total cash flows
Discount factor (13%)
Present value
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.)

Item	Cash Flow	Years	Total Cash Flows
Annual cost savings			$0
Initial investment			0
Net cash flow			$0