Head, Inc. 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:
(Note: Present value tables are needed.)
$$\begin{array} { | l | l | }
\hline \text { Year 1 } & \$ 130,000 \
\hline \text { Year 2 } & \$ 125,000 \
\hline \text { Year 3 } & \$ 110,000 \
\hline \text { Year 4 } & \$ 100,000 \
\hline \text { Year 5 } & \$ 95,000 \
\hline \text { Year 6 } & \$ 90,000 \
\hline
\end{array}$$ Head, Inc.'s hurdle rate is 12%. Assume residual value is zero. What is the net present value of the equipment investment?

Question

Head, Inc. 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:
(Note: Present value tables are needed.)
$$\begin{array} { | l | l | } 
\hline \text { Year 1 } & \$ 130,000 \
\hline \text { Year 2 } & \$ 125,000 \
\hline \text { Year 3 } & \$ 110,000 \
\hline \text { Year 4 } & \$ 100,000 \
\hline \text { Year 5 } & \$ 95,000 \
\hline \text { Year 6 } & \$ 90,000 \
\hline
\end{array}$$ Head, Inc.'s hurdle rate is 12%. Assume residual value is zero. What is the net present value of the equipment investment?

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the equipment investment, we need to discount each of the projected net cash inflows back to their present value at the hurdle rate of 12%, and then subtract the initial investment of $450,000.Using present value of an annuity tables or a financial calculator, the present values (PV) of the cash inflows at 12% are approximately:- Year 1: $130,000 / (1 + 0.12)^1 = $116,071- Year 2: $125,000 / (1 + 0.12)^2 = $99,719- Year 3: $110,000 / (1 + 0.12)^3 = $78,355- Year 4: $100,000 / (1 + 0.12)^4 = $63,973- Year 5: $95,000 / (1 + 0.12)^5 = $54,184- Year 6: $90,000 / (1 + 0.12)^6 = $45,828Adding these present values gives a total PV of cash inflows of approximately $457,130. Subtracting the initial investment of $450,000 gives an NPV of approximately $7,130.

Head, Inc Is Deciding Whether to Automate One Phase of Its