Walker 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 ................................................................................................... $262,000
Year 2 ................................................................................................... $255,000
Year 3 ................................................................................................... $224,000
Year 4 ................................................................................................... $210,000
Year 5 ................................................................................................... $204,000
Year 6 ................................................................................................... $173,000
Requirements
1. Compute this project's NPV using Walker Industries' 14% hurdle rate. Should the company invest in the equipment? Why or why not?
2. Walker Industries could refurbish the equipment at the end of six years for $105,000. The refurbished equipment could be used one more year, providing $72,000 of net cash inflows in Year 7. In addition, the refurbished equipment would have a $55,000 residual value at the end of Year 7. Should Walker Industries invest in the equipment and refurbish it after six years? Why or why not? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)