In: Accounting
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?
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