Chapter 12 Demo Solution - Chapter12 DemoProblem1...

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Chapter 12 Demo Problem 1 Net Present Value Method  The management of Opry Company, a wholesale distributor of suntan  products, is considering the purchase of a machine that would reduce  operating costs in its warehouse. The machine will cost $25,000, and it will  last for 10 years. At the end of the 10-year period, the machine will have  zero scrap value. Use of the machine will reduce operating costs by $4,000  per year. The company requires a minimum return of 14% before taxes on  all investment projects.  Required:   1. Determine the net present value of the investment in the machine.  2. What is the difference between the total, undiscounted, cash inflows  and cash outflows over the entire life of the machine?  1.  Item   Year(s )   Cash  Flow   14%  Factor   Present Value of  Cash Flows      Annual cost  savings  1-10  $4,000  5.216  $20,864     Initial  investment  Now  (25,000)  1.000  (   25,000              Net present  value           $(4,136)     2.  Item   Cash  Flow  Years  Total Cash Flows     Annual cost savings  $4,000  10  $40,000 
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   Initial investment  (25,000)  (   25,000                       Net cash flow        $15,000 
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Demo Problem 2 Comparison of Projects Using Net Present Value  Service Temps, a company that supplies temporary workers for restaurants  and other service industries, has $15,000 to invest. Management is trying to  decide between two alternative uses of the funds. The alternatives are as  follows:     Invest in  Project A   Invest in  Project B   Investment required  $15,000  $15,000  Annual cash inflows  $4,000  $0  Single cash inflow at the end of 
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Chapter 12 Demo Solution - Chapter12 DemoProblem1...

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