Bevil Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $900,000. Projected net cash inflows are as follows:
Year 1................................................................................................... $260,000
Year 2................................................................................................... $250,000
Year 3................................................................................................... $225,000
Year 4................................................................................................... $210,000
Year 5................................................................................................... $200,000
Year 6................................................................................................... $175,000
Requirements
1. Compute this project’s NPV using Bevil Industries’ 14% hurdle rate. Should Bevil Industries invest in the equipment? Why or why not?
2. Bevil Industries could refurbish the equipment at the end of six years for $100,000. 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 $50,000 residual value at the end of Year 7. Should Bevil Industries invest in the equipment and refurbish it after six years? Why or why not?