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RST corporation is deciding whether to automate one phase of its production process. The equipment has...

RST corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $ 205,000. Projected net cash inflows from the equipment are as follows:

Year 1

$ 60,000

Year 2

$ 50,000

Year 3

$ 55,000

Year 4

$ 50,000

Year 5

$ 47,500

Year 6

$ 45,000

RST corporation hurdle rate is 12%.

If RST corporation decides to refurbish the equipment at a cost of $30,000 at the end of year 6, it could be used for one more year and would have a $ 15,000 residual value at the end of year 7. Assume the cash inflow in year 7 is $ 32,500. What is the NPV of just the refurbishment?

Correct Answer: $ 6,260 Please show the formula for this amount . Thank you.

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Homework Answers

Answer #1
Year Value Flows Present Factor @ 12% Present Value
(a) (b) (a) X (b)
Refurbish cost 6 $       -30,000 0.507 $           -15,210
Cash Inflows 7 $         32,500 0.452 $            14,690
Salvage Value 7 $         15,000 0.452 $               6,780
Net Present Value $               6,260
Present value factor of $1 at 12% at n = 6 is 0.507 and at n = 7 is 0.452
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