Monette 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 ................................................................................................................ $253,000
Year 3 ................................................................................................................ $225,000
Year 4 ................................................................................................................ $215,000
Year 5 ................................................................................................................ $204,000
Year 6 ................................................................................................................ $178,000
Requirements
1. Compute this project's NPV using Monette Industries' 14% hurdle rate. Should Monette Industries invest in the equipment? Why or why not?
2. Monette Industries could refurbish the equipment at the end of six years for $100,000. The refurbished equipment could be used one more year, providing $76,000 of net cash inflows in Year 7. In addition, the refurbished equipment would have a $52,000 residual value at the end of Year 7. Should Monette Industries invest in the equipment and refurbish it after six years? Why or why not?