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Broadway Industries is considering whether to automate one phase of its production line. The automation
equipment has a six
-
year life
with no residual
and will cost $890,000. Projected net cash flows are as follows:
Year 1
$ 250,000
Year 2
240,000
Year 3
210,000
Year 4
205,000
Year 5
200,000
Year 6
180,000
Requirement 1
: Compute this projects Net Present Value (NPV) using Broadways 10% hurdle (required) rate.
Should Broadway invest in the automation e
quipment?
Year
Net Cash Flow
PV Factor from Table
Present Value
1
9.
2
3
4
5
6
__________
Present Value of Cash Inflows $
948,935
Initial Investment
__________
Net Present Value of the project
$
10.
Should Broadway invest in the project? Yes or No
Requirement 2:
Broad
way
could refurbish the equipment at
the end of the six years for
$100,000. The
refurbished equipment could then be used one more year, providing $60,000 of net cash inflows in year 7 and the
equipment would then have a residual value of $44,000 at the end of year 7
. Should Broadway plan to
refurbish
the equipment after six years?
Cash (Outflow) or Inflow
PV Factor from Table
Present Value
Refurbishment at the end of 6 years (100,000)
.564
Cash inflows in year 7 60,000
Residual Value in year 7
11.
________
Net Present Value of
the refurbishment
12.
Should Broadway invest in the refurbishment?
Broadway Industries is considering whether to automate one phase of its production line. The automation
equipment has a six
-
year life
with no residual
and will cost $890,000. Projected net cash flows are as follows:
Year 1
$ 250,000
Year 2
240,000
Year 3
210,000
Year 4
205,000
Year 5
200,000
Year 6
180,000
Requirement 1
: Compute this projects Net Present Value (NPV) using Broadways 10% hurdle (required) rate.
Should Broadway invest in the automation e
quipment?
Year
Net Cash Flow
PV Factor from Table
Present Value
1
9.
2
3
4
5
6
__________
Present Value of Cash Inflows $
948,935
Initial Investment
__________
Net Present Value of the project
$
10.
Should Broadway invest in the project? Yes or No
Requirement 2:
Broad
way
could refurbish the equipment at
the end of the six years for
$100,000. The
refurbished equipment could then be used one more year, providing $60,000 of net cash inflows in year 7 and the
equipment would then have a residual value of $44,000 at the end of year 7
. Should Broadway plan to
refurbish
the equipment after six years?
Cash (Outflow) or Inflow
PV Factor from Table
Present Value
Refurbishment at the end of 6 years (100,000)
.564
Cash inflows in year 7 60,000
Residual Value in year 7
11.
________
Net Present Value of
the refurbishment
12.
Should Broadway invest in the refurbishment?
Answer & Explanation
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