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9 March, 15:03

The management of Kunkel Company is considering the purchase of a $37,000 machine that would reduce operating costs by $8,000 per year. At the end of the machine's five-year useful life, it will have zero salvage value. The company's required rate of return is 12%.

Determine the net present value of the investment in the machine.

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  1. 9 March, 15:32
    0
    -$8,162

    Explanation:

    The computation of the net present value is shown below:

    Net present value = Present value after considering the discounting factor - initial investment

    where,

    Present value = Annual cash flows * PVIFA factor for 12% at 5 years

    = $8,000 * 3.6048

    = $28,838.40

    So, the present value is

    = $28,838.40 - $37,000

    = - $8,162

    Refer to the PVIFA table
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