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 projects NPV using Sprockets 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 refurbish it after six years? (Hint: In addition to your answer to Requirement 1, discount the additional cash outflow and inflows back to the present value.)