Fielding Industries is deciding whether to automate one phase of its production process.
The manufacturing equipment has a six-year life and will cost $910,000.
Projected net cash inflows are as follows:
Year 1................................................................................................... $264,000
Year 2................................................................................................... $254,000
Year 3................................................................................................... $222,000
Year 4................................................................................................... $210,000
Year 5................................................................................................... $204,000
Year 6................................................................................................... $178,000
Requirements
1. Compute this project’s NPV using Fielding Industries’ 16% hurdle rate. Should Fielding Industries invest in the equipment? Why or why not?
2. Fielding Industries could refurbish the equipment at the end of six years for $105,000. The refurbished equipment could be used for one more year, providing $77,000 of net cash inflows in Year 7. Additionally, the refurbished equipment would have a $55,000 residual value at the end of Year 7. Should Fielding Industries invest in the equipment and refurbish it after six years? Why or why not?