Eon Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $920,000. Projected net cash inflows are as follows:
Year 1..................................................$ 261,000
Year 2.................................................. 254,000
Year 3.................................................. 227,000
Year 4.................................................. 211,000
Year 5.................................................. 201,000
Year 6.................................................. 175,000
Requirements
1. Compute this project’s NPV using Eon’s 16% hurdle rate. Should Eon invest in the equipment?
2. Eon 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 $51,000 residual value at the end of year 7. Should Eon invest in the equipment and refurbish it after six years?