Sprocket Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six- year life and will cost $ 905,000. Projected net cash inflows are as follows:

Year 1 .. $ 260,000

Year 2 .. 254,000

Year 3 .. 225,000

Year 4 .. 215,000

Year 5 .. 205,000

Year 6 .. 173,000

Requirements

1. Compute this project’s NPV using Sprocket’s 16% hurdle rate. Should Sprocket invest in the equipment?

2. Sprocket could refurbish the equipment at the end of six years for $ 103,000. The refurbished equipment could be used one more year, providing $ 75,000 of net cash inflows in year 7. Additionally, the refurbished equipment would have a $ 54,000 residual value at the end of year 7. Should Sprocket invest in the equipment and refurbish it after six years?