Question

Kerwin Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six- year life and will cost $ 925,000. Projected net cash inflows are as follows:
Year 1.......................................................................................................... $ 261,000
Year 2.......................................................................................................... $ 250,000
Year 3.......................................................................................................... $ 228,000
Year 4.......................................................................................................... $ 214,000
Year 5.......................................................................................................... $ 203,000
Year 6.......................................................................................................... $ 176,000

Requirements
1. Compute this project’s NPV using Kerwin Industries’ 16% hurdle rate. Should the company invest in the equipment? Why or why not?
2. Kerwin Industries could refurbish the equipment at the end of six years for $ 106,000. The refurbished equipment could be used one more year, providing $ 75,000 of net cash inflows in Year 7. In addition, the refurbished equipment would have a $ 53,000 residual value at the end of Year 7. Should Kerwin Industries 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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