manufacturing equipment has a 6-year life, cost=$900,000. projected net cash inf
ID: 2349816 • Letter: M
Question
manufacturing equipment has a 6-year life, cost=$900,000. projected net cash inflows:year
1 $264,000
2 $251,000
3 $228,000
4 $213,000
5 $202,000
6 $176,000
compute this project's NVP using the industry's 14% hurdle rate. should the industry invest in the equipment?
the industry could refurbish the equipment at the end of the 6 years for $106,000. the refurbished equipment can be used 1 more year, providing $78,000 of net cash inflows in year 7. the refurbished equipment would have a $52,000 residual value at the end of year 7.
should the industry invest in the equipment and refurbishing it after 6 years?
**the answer in my textbook says: NPV = $(10,363) additional NPV provided from refurbishment $3,664
I tried to calculate it, but I can't seem to get the right answer
can someone show me the way how to do it, the calculations, etc. not just the answer. thx a lot! appreciate it.
Explanation / Answer
Computation of NPV for six Years: By using excel spread sheet we can calculate the NPV. Inset PV in formula bar and take the values as follows. Rate: 14% Value1: 264000 Value2:251000 Value3:228000 Value4: 213000 Value5: 202000 Value6: 176000 By enter you can get the value as $889,817.60 NPV = $889,817.60 - Cost =$889,817.60 - 900,000 =(-)$10,182.40 The industray should not invest in the equipment because the negative NPV. At the end of the sixth year the cash flows are = 176,000 + 106,000 = $282,000 For the seventh year the cash flows are $78,000. by using these values we can compute NPV. By using excel we can calculte the NPV. Inset NPV in formula bar and take the values as follows. Value1: 264000 Value2: 251000 Value3:228000 Value4:213000 Value5:202000 Value6:282000 Value7:78000 By enter we can get the value as $920,989.32. NPV = $969,281.49 - Cost - Residul value = $969,281.49 - $900,000 -$52,000 = $17,218.49 Yes, after refurbishment the industry should invest in the equipment.
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