Question
Installation of a new manufacturing line requires a capital expenditure of $250,000 in Year 0. Periodic maintenance of the one begins in year 2 and
Installation of a new manufacturing line requires a capital expenditure of $250,000 in Year 0. Periodic maintenance of the one begins in year 2 and occurs every 2 years (including year 8), at a cost of $10,000 each year. Yearly revenue begins in Year 1 at $20,000 and increases by $20,000 every year through year 7. In the last year of its life (Year 8), the only income received is the equipment salvage value of $50,000. Conduct a discounted cash flow to determine the net present value (NPV) of the project if the hurdle rate is 17%. Based strictly on NPV, is this project a good investment? Why or why not? Would your answer change if you also included a 3% inflation rate in your calculation? If yes, how? (Note: NPV may be found in Recording 8.5, ~ 26 minutes)
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