Question

Using NPV to make capital investment decisions

Holmes Industries is deciding whether to automate one phase of its production process. The manufacturing equipment has a six-year life and will cost $910,000. Projected net cash inflows are as follows:

Year 1	$ 262,000
Year 2	254,000
Year 3	222,000
Year 4	215,000
Year 5	200,000
Year 6	175,000

Requirements

1. Compute this project’s NPV using Holmes’s 14% hurdle rate. Should Holmes invest in the equipment? (Compute and provide NPV and write out your conclusion regarding this investment)

Answer 1