Question

Broadway Industries is considering whether to automate one phase of its production line. The automation

equipment has a six

-

year life

with no residual

and will cost $890,000. Projected net cash flows are as follows:

Year 1

$ 250,000

Year 2

240,000

Year 3

210,000

Year 4

205,000

Year 5

200,000

Year 6

180,000

Requirement 1

: Compute this project’s Net Present Value (NPV) using Broadway’s 10% hurdle (required) rate.

Should Broadway invest in the automation e

quipment?

Year

Net Cash Flow

PV Factor from Table

Present Value

1

9.

2

3

4

5

6

__________

Present Value of Cash Inflows $

948,935

Initial Investment

__________

Net Present Value of the project

$

10.

Should Broadway invest in the project? Yes or No

Requirement 2:

Broad

way

could refurbish the equipment at

the end of the six years for

$100,000. The

refurbished equipment could then be used one more year, providing $60,000 of net cash inflows in year 7 and the

equipment would then have a residual value of $44,000 at the end of year 7

. Should Broadway plan to

refurbish

the equipment after six years?

Cash (Outflow) or Inflow

PV Factor from Table

Present Value

Refurbishment at the end of 6 years (100,000)

.564

Cash inflows in year 7 60,000

Residual Value in year 7

11.

________

Net Present Value of

the refurbishment

12.

Should Broadway invest in the refurbishment?

Broadway Industries is considering whether to automate one phase of its production line. The automation

equipment has a six

-

year life

with no residual

and will cost $890,000. Projected net cash flows are as follows:

Year 1

$ 250,000

Year 2

240,000

Year 3

210,000

Year 4

205,000

Year 5

200,000

Year 6

180,000

Requirement 1

: Compute this project’s Net Present Value (NPV) using Broadway’s 10% hurdle (required) rate.

Should Broadway invest in the automation e

quipment?

Year

Net Cash Flow

PV Factor from Table

Present Value

1

9.

2

3

4

5

6

__________

Present Value of Cash Inflows $

948,935

Initial Investment

__________

Net Present Value of the project

$

10.

Should Broadway invest in the project? Yes or No

Requirement 2:

Broad

way

could refurbish the equipment at

the end of the six years for

$100,000. The

refurbished equipment could then be used one more year, providing $60,000 of net cash inflows in year 7 and the

equipment would then have a residual value of $44,000 at the end of year 7

. Should Broadway plan to

refurbish

the equipment after six years?

Cash (Outflow) or Inflow

PV Factor from Table

Present Value

Refurbishment at the end of 6 years (100,000)

.564

Cash inflows in year 7 60,000

Residual Value in year 7

11.

________

Net Present Value of

the refurbishment

12.

Should Broadway invest in the refurbishment?

Answer 1

	Year	Cash Flow	PV Factor	Present Value
			1 / (1 + 10%)^Year
Intital Investment	0	$(890,000)	1.000	$      (890,000)
	1	$ 250,000	0.909	$        227,250
	2	$ 240,000	0.826	$        198,240
	3	$ 210,000	0.751	$        157,710
	4	$ 205,000	0.683	$        140,015
	5	$ 200,000	0.621	$        124,200
	6	$ 180,000	0.564	$        101,520
				$          58,935

Yes, the company should invest in the project since the NPV is positive

	Year	Cash Flow	PV Factor	Present Value
			1 / (1 + 10%)^Year
Intital Investment	0	$(890,000)	1.000	$      (890,000)
	1	$ 250,000	0.909	$        227,250
	2	$ 240,000	0.826	$        198,240
	3	$ 210,000	0.751	$        157,710
	4	$ 205,000	0.683	$        140,015
	5	$ 200,000	0.621	$        124,200
	6	$ 180,000	0.564	$        101,520
	6	$(100,000)	0.564	$        (56,400)
	7	$    60,000	0.513	$          30,780
	7	$    44,000	0.513	$          22,572
				$          55,887

The NPV due to refurbishment is -3,048

Company should not go for refurbishment

Answer 2

	Year	Cash Flow	PV Factor	Present Value
			1 / (1 + 10%)^Year
Intital Investment	0	$(890,000)	1.000	$      (890,000)
	1	$ 250,000	0.909	$        227,250
	2	$ 240,000	0.826	$        198,240
	3	$ 210,000	0.751	$        157,710
	4	$ 205,000	0.683	$        140,015
	5	$ 200,000	0.621	$        124,200
	6	$ 180,000	0.564	$        101,520
				$          58,935

Yes, the company should invest in the project since the NPV is positive

	Year	Cash Flow	PV Factor	Present Value
			1 / (1 + 10%)^Year
Intital Investment	0	$(890,000)	1.000	$      (890,000)
	1	$ 250,000	0.909	$        227,250
	2	$ 240,000	0.826	$        198,240
	3	$ 210,000	0.751	$        157,710
	4	$ 205,000	0.683	$        140,015
	5	$ 200,000	0.621	$        124,200
	6	$ 180,000	0.564	$        101,520
	6	$(100,000)	0.564	$        (56,400)
	7	$    60,000	0.513	$          30,780
	7	$    44,000	0.513	$          22,572
				$          55,887

The NPV due to refurbishment is -3,048

Company should not go for refurbishment