Venu

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.

Requirement 1. Compute this project's NPV using

Venu 's

14 %

hurdle rate. Should

Venu

invest in the equipment?

Use the following table to calculate the net present value of the project. (Enter any factor amounts to three decimal places, X.XXX. Use parentheses or a minus sign for a negative net present value.)

		Net Cash		PV Factor		Present
Years		Inflow		(i = 14%)		Value
	Present value of each year's inflow:
1	(n = 1)
2	(n = 2)
3	(n = 3)
4	(n = 4)
5	(n = 5)
6	(n = 6)
	Total PV of cash inflows
0	Initial investment
	Net present value of the project

Year 1	$263,000
Year 2	254,000
Year 3	224,000
Year 4	210,000
Year 5	200,000
Year 6	178,00

Present Value of Annuity of $1
Periods	1%	2%	3%	4%	5%	6%	7%	8%	9%	10%	12%	14%	15%	16%	18%	20%
1	0.990	0.980	0.971	0.962	0.952	0.943	0.935	0.926	0.917	0.909	0.893	0.877	0.870	0.862	0.847	0.833
2	1.970	1.942	1.913	1.886	1.859	1.833	1.808	1.783	1.759	1.736	1.690	1.647	1.626	1.605	1.566	1.528
3	2.941	2.884	2.829	2.775	2.723	2.673	2.624	2.577	2.531	2.487	2.402	2.322	2.283	2.246	2.174	2.106
4	3.902	3.808	3.717	3.630	3.546	3.465	3.387	3.312	3.240	3.170	3.037	2.914	2.855	2.798	2.690	2.589
5	4.853	4.713	4.580	4.452	4.329	4.212	4.100	3.993	3.890	3.791	3.605	3.433	3.352	3.274	3.127	2.991
6	5.795	5.601	5.417	5.242	5.076	4.917	4.767	4.623	4.486	4.355	4.111	3.889	3.784	3.685	3.498	3.326
7	6.728	6.472	6.230	6.002	5.786	5.582	5.389	5.206	5.033	4.868	4.564	4.288	4.160	4.039	3.812	3.605
8	7.652	7.325	7.020	6.733	6.463	6.210	5.971	5.747	5.535	5.335	4.968	4.639	4.487	4.344	4.078	3.837
9	8.566	8.162	7.786	7.435	7.108	6.802	6.515	6.247	5.995	5.759	5.328	4.946	4.772	4.607	4.303	4.031
10	9.471	8.983	8.530	8.111	7.722	7.360	7.024	6.710	6.418	6.145	5.650	5.216	5.019	4.833	4.494	4.192

1.

Compute this project's NPV using Venu 's 14 % hurdle rate. Should Venu invest in the equipment?

2.

Venu could refurbish the equipment at the end of six years for $106,000. 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 $50,000 residual value at the end of year 7. Should Venu 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.)