Holmes Industries is deciding whether to automate one phase of its production process.
The manufacturing equipment has a six-year life and will cost $910,000. Projected net cash inflows are as follows:
Year 1 ............ $ 262,000
Year 2 ............... 254,000
Year 3 ............... 222,000
Year 4 .............. 215,000
Year 5 .............. 200,000
Year 6 ............. 175,000
Requirements
1. Compute this project's NPV using Holmes's 14% hurdle rate. Should Holmes invest in the equipment?
2. Holmes 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 $55,000 residual value at the end of year 7. Should Holmes invest in the equipment and refurbish it after six years? (In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)