St Germaine Industries is deciding whether to automate one phase of its producti

Question

St Germaine Industries is deciding whether to automate one phase of its production process .The manufacturing equipment has a six-year life and will cost S915,000 (Click the icon to view the projected net cash inflows.) (Click the icon to view the present value table.) (Click the icon to view the future value table.) (Click the icon to view the present value annuity table.) (Click the icon to view the future value annuity table.) Requirements Compute this project's NPV using St Germaine Industries' 16% hurdle rate Should St Germaine Industries invest in the equipment? Why or why not? St Germaine 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 $53.000 residual value at the end of Year 7. Should St Germaine Industries invest in the equipment and refurbish it after six years? Why or why not? Compute this project's NPV using St Germaine Industries' 16% hurdle rate Should St Germaine Industries invest in the equipment? Why or why not? Begin by computing the project's NPV (net present value) (Round your answer to the nearest whole dollar Use parentheses or a minus sign for negative net present values) Net present value________St Germaine Industries invest in the equipment because its NPV is Requirement 2. St Germaine Industries could refurbish the equipment at the end of six years for S105.000 The refurbished equipment could be used one more year, providing S72.000 of net cash inflows in Year 7. In addition, the refurbished equipment would have a S53.000 residual value at the end of Year 7. Should St Germaine Industries invest in the equipment and refurbish it after six years? Why or why not? Calculate the additional NPV provided from the refurbishment (Round your answer to the nearest whole dollar Use parentheses or a minus sign for negative net present values) Additional NPV provided from refurbish....___________The refurbishment provides a NPV. The refurbishment NPV is to overcome the original NPV of the equipment Therefore, the refurbishment alter St Germaine Industries' original decision regarding the equipment investment

Explanation / Answer

cash outflow 915000 Year Net cash inflow present value @16% present value of cash inflow 1 262000 0.862069 225862.069 2 254000 0.743163 188763.3769 3 225000 0.640658 144147.9765 4 213000 0.552291 117638.0038 5 204000 0.476113 97127.05514 6 175000 0.410442 71827.39457 present value of cash inflow 845365.876 cash outflow 915000 NPV -69634.124 NPV of the project is negative so it should not be accepted Answer to 2 Year Net cash inflow present value @16% present value of cash inflow cash outflow at period 0 915000 1 262000 0.862069 225862.069 present value of cash outflow at year 6 43096.4367 2 254000 0.743163 188763.3769 3 225000 0.640658 144147.9765 present value of cash outflow 958096.437 4 213000 0.552291 117638.0038 5 204000 0.476113 97127.05514 6 175000 0.410442 71827.39457 7 72000 0.35383 25475.72615 8 53000 0.35383 18752.96508 present value of cash inflow 889594.5672 cash outflow 958096.4367 NPV -68501.8695 NPV of refirbishment 1132.254496 company should not refurbishment of equipment as it also result in overall negative NPV. Even only the NPV of refurbishment is positive and value is 1132 so if we go for refurbishment it would result in decreasing overall NPV. So we can go for refurbishment

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