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 equipment?

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

2. Broadway 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