Compute this projects npv using sprockets 16 hurdle rate

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Using discounted cash flow models to make capital investment decisions

Sprocket Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $905,000. Projected net cash inflows are as follows:

Year 1

$260,000

Year 2

$254,000

Year 3

$225,000

Year 4

$215,000

Year 5

$205,000

Year 6

$173,000

Requirements

1. Compute this project's NPV using Sprocket's 16% hurdle rate. Should Sprocket invest in the equipment?

2. Sprocket could refurbish the equipment at the end of six years for $103,000. The refurbished equipment could be used one more year, providing $75,000 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 Sprocket invest in the equipment and refurbishing it after six years?

Reference no: EM13483835

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