Using NPV to make capital investment decisionsHolmes Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $910,000. Projected net cash inflows are as follows:RequirementsCompute this project’s NPV using Holmes’s 14% hurdle rate. Should Holmes invest in the equipment?Holmes could refurbish the equipment at the end of six years for $104,000. 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 $55,000 residual value at the end of year 7. Should Holmes invest in the equipment and refurbish it after six years? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.) Year 1$ 262,000Year 2254,000Year 3222,000Year 4215,000Year 5200,000Year 6175,000

NPV: Net present value (NPV) is the method to evaluate the project feasibility. This method…

Answered: Year 1 $ 262,000 Year 2 254,000 Year 3…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Using NPV to make capital investment decisions

Holmes Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $910,000. Projected net cash inflows are as follows:

Requirements

Compute this project’s NPV using Holmes’s 14% hurdle rate. Should Holmes invest in the equipment?
Holmes could refurbish the equipment at the end of six years for $104,000. 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 $55,000 residual value at the end of year 7. Should Holmes 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.)

Year 1
$ 262,000
Year 2
254,000
Year 3
222,000
Year 4
215,000
Year 5
200,000
Year 6
175,000

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