Petal Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $915,000. Projected net cash inflows are as follows: Year 1 $263,000 Year 2 252,000 Year 3 222,000 Year 4 214,000 Year 5 201,000 Year 6 178,000 1. Compute this project's NPV using Petal's 14% hurdle rate. Should Petal invest in the equipment? 2. Petal could refurbish the equipment at the end of six years for $100,000. The refurbished equipment could be used one more year, providing $77,000 of net cash inflows in year 7. Additionally, the refurbished equipment would have a $52,000 residual value at the end of year 7. Should Petal invest in the equipment and refurbish it after six years? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)
Petal Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $915,000. Projected net cash inflows are as follows: Year 1 $263,000 Year 2 252,000 Year 3 222,000 Year 4 214,000 Year 5 201,000 Year 6 178,000 1. Compute this project's NPV using Petal's 14% hurdle rate. Should Petal invest in the equipment? 2. Petal could refurbish the equipment at the end of six years for $100,000. The refurbished equipment could be used one more year, providing $77,000 of net cash inflows in year 7. Additionally, the refurbished equipment would have a $52,000 residual value at the end of year 7. Should Petal invest in the equipment and refurbish it after six years? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Petal
Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost
$915,000.
Projected net
|
Year 1
|
$263,000
|
|---|---|
|
Year 2
|
252,000
|
|
Year 3
|
222,000
|
|
Year 4
|
214,000
|
|
Year 5
|
201,000
|
|
Year 6
|
178,000
|
|
1.
|
Compute this project's NPV using
Petal's
14%
hurdle rate. Should
Petal
invest in the equipment? |
|
2.
|
Petal
could refurbish the equipment at the end of six years for
$100,000.
The refurbished equipment could be used one more year, providing
$77,000
of net cash inflows in year 7. Additionally, the refurbished equipment would have a
$52,000
residual value at the end of year 7. Should
Petal
invest in the equipment and refurbish it after six years?
(Hint:
In addition to your answer to Requirement 1, discount the additional |
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