(L. OBJ. 4) Using discounted cash flow models to make capital investment decisions [15-2...

(L. OBJ. 4) Using discounted cash flow models to make capital investment decisions [15-20 min]

Bevil 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:

Requirements

1. Compute this project’s NPV using Bevil Industries’s 14% hurdle rate. Should Bevil Industries invest in the equipment?

2. Bevil Industries could refurbish the equipment at the end of six years for $106,000. The refurbished equipment could be used one more year, providing $78,000 of net cash inflows in year 7. Additionally, the refurbished equipment would have a $52,000 residual value at the end of year 7. Should Bevil Industries invest in the equipment and refurbishing 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.)