Question

Nord 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: (Click the icon to view the projected net cash inflows.) (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) Read the requirements. Use the following table to calculate the net present value of the project. (Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.) Net Cash Inflow PV Factor (i = 14%) Present Value Years Data Table - X $ 1 2 3 4 5 Present value of each year's inflow. (n = 1) (n=2) (n = 3) (n = 4) (n = 5) (n = 6) Total PV of cash inflows Initial investment 263,000 252,000 226,000 214,000 204,000 174,000 0.877 0.769 0.675 0.592 0.519 0.456 230,651 193,788 152,550 126,688 105,876 79,344 888,897 (900,000) (11,103) Year 1 $ Year 2 Year 3 Year 4 Year 5 Year 6 263,000 252,000 226,000 214,000 204,000 174,000 0 Net present value of the project Print Done Nord Industries should not invest in the equipment. Requirement 2. Nord could refurbish the equipment at the end of six years for $104,000. The refurbished equipment could be used one more year, providing $73,000 of net cash inflows in year 7. Additionally, the refurbished equipment would have a $54,000 residual value at the end of year 7. Should Nord invest in the equipment and refurbish it after six years? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.) Calculate the NPV of the refurbishment. (Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for cash outflows and for a negative net present value.) Cash (outflow)/inflow PV Factor (i = 14%) Present Value Refurbishment at the end of Year 6 (n = 6) Cash inflows in Year 7 (n = 7) Residual value (n = 7) Net present value of the refurbishment

Answer 1

Correct Answer:

	Cash (outflow)/inflow	PV Factor ( i=14%	Present value
Refurbishment at the end of year 6 (n=6)	$    (104,000.00)	$                            0.456	$      (47,424.00)
Cash inflow in year 7 ( n=7)	$         73,000.00	$                         0.400	$        29,200.00
Residual value ( n=7)	$         54,000.00	$                         0.400	$        21,600.00
Net present value of the refurbishment			$           3,376.00

End of answer.

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