Gammaro 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. . . . . . . . . . . . . . . . . .$262,000

Year 2. . . . . . . . . . . . . . . . . .$254,000

Year 3. . . . . . . . . . . . . . . . . .$228,000

Year 4. . . . . . . . . . . . . . . . . .$213,000

Year 5. . . . . . . . . . . . . . . . . .$201,000

Year 6. . . . . . . . . . . . . . . . . .$178,000

1.

Compute this project's NPV using Gammaro Industries' 14% hurdle rate. Should the company invest in the equipment? Why or why not?

2. Gammaro Industries could refurbish the equipment at the end of six years for $103,000. The refurbished equipment could be used one more year, providing $72,000of net cash inflows in Year 7. In addition, the refurbished equipment would have a $55,000 residual value at the end of Year 7. Should Gammaro Industries invest in the equipment and refurbish it after six years? Why or whynot? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)