Question

Alderman 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....................................................................................................... $ 264,000
Year 2....................................................................................................... $ 253,000
Year 3....................................................................................................... $ 224,000
Year 4....................................................................................................... $ 213,000
Year 5....................................................................................................... $ 204,000
Year 6....................................................................................................... $ 177,000

Requirements
1. Compute this project’s NPV using Alderman Industries’ 16% hurdle rate. Should the company invest in the equipment? Why or why not?
2. Alderman Industries could refurbish the equipment at the end of six years for $ 104,000. The refurbished equipment could be used for one more year, providing $ 76,000 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 the company invest in the equipment and refurbish it after six years? Why or why not?



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  • CreatedAugust 27, 2014
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