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Sunny Days Corporation is deciding whether to automate one phase of its production process. The...

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Accounting

Sunny Days Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $450,000. Projected net cash inflows from the equipment are as follows:

Year 1 $60,000
Year 2 $70,000
Year 3 $140,000
Year 4 $90,000
Year 5 $74,000
Year 6 $92,000

Sunny Days Corporation's hurdle rate is 12%. If Sunny Days Corporation decides to refurbish the equipment at a cost of $60,000 at the end of year 6, it could be used for one more year and would have a $10,000 residual value at the end of year 7. Assume the cash inflow in year 7 is $85,000. What is the NPV of just the refurbishment?

Present Value of $1

Periods 10% 12% 14% 16%
1 0.909 0.893 0.877 0.862
2 0.826 0.797 0.769 0.743
3 0.751 0.712 0.675 0.641
4 0.683 0.636 0.592 0.552
5 0.621 0.567 0.519 0.476
6 0.564 0.507 0.456 0.410
7 0.513 0.452 0.400 0.354

Present Value of Annuity of $1

Periods 10% 12% 14% 16%
1 0.909 0.893 0.877 0.862
2 1.736 1.690 1.647 1.605
3 2.487 2.402 2.322 2.246
4 3.170 3.037 2.914 2.798
5 3.791 3.605 3.433 3.274
6 4.355 4.111 3.889 3.685
7 4.868 4.564 4.288 4.039

$12,520

$42,940

$(8000)

$18,600

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