Petal Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $915,000. Projected net cash inflows are as follows: Year 1 $263,000 Year 2 252,000 Year 3 222,000 Year 4 214,000 Year 5 201,000 Year 6 178,000 1. Compute this project's NPV using Petal's 14% hurdle rate. Should Petal invest in the equipment? 2. Petal could refurbish the equipment at the end of six years for $100,000. The refurbished equipment could be used one more year, providing $77,000 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 Petal 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.)
Petal Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $915,000. Projected net cash inflows are as follows: Year 1 $263,000 Year 2 252,000 Year 3 222,000 Year 4 214,000 Year 5 201,000 Year 6 178,000 1. Compute this project's NPV using Petal's 14% hurdle rate. Should Petal invest in the equipment? 2. Petal could refurbish the equipment at the end of six years for $100,000. The refurbished equipment could be used one more year, providing $77,000 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 Petal 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.)
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 21P
Related questions
Question
Petal
Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost
$915,000.
Projected net
|
Year 1
|
$263,000
|
|---|---|
|
Year 2
|
252,000
|
|
Year 3
|
222,000
|
|
Year 4
|
214,000
|
|
Year 5
|
201,000
|
|
Year 6
|
178,000
|
|
1.
|
Compute this project's NPV using
Petal's
14%
hurdle rate. Should
Petal
invest in the equipment? |
|
2.
|
Petal
could refurbish the equipment at the end of six years for
$100,000.
The refurbished equipment could be used one more year, providing
$77,000
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
Petal
invest in the equipment and refurbish it after six years?
(Hint:
In addition to your answer to Requirement 1, discount the additional |
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Managerial Accounting: The Cornerstone of Busines…
Accounting
ISBN:
9781337115773
Author:
Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College