Allied Chemicals has a hurdle rate of 9% for new investments. The production manager suggests that an equipment upgrade costing $84,460 would yield net cash flows of $40,000 in the first year, $30,000 in the second year, $20,000 in the third year, and $10,000 in the fourth and final year.
$$\begin{array} { | r | r | r | r | r | r | r | }
\hline \text { Present Value of } & & & & & & \
\$1\
\hline & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.823 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \
\hline
\end{array}$$
The investment meets the company's hurdle rate requirement and should be adopted.

Question

Allied Chemicals has a hurdle rate of 9% for new investments. The production manager suggests that an equipment upgrade costing $84,460 would yield net cash flows of $40,000 in the first year, $30,000 in the second year, $20,000 in the third year, and $10,000 in the fourth and final year.
 $$\begin{array} { | r | r | r | r | r | r | r | } 
\hline \text { Present Value of } & & & & & & \
\$1\
\hline & 5 \% & 6 \% & 7 \% & 8 \% & 9 \% & 10 \% \
\hline 1 & 0.952 & 0.943 & 0.935 & 0.926 & 0.917 & 0.909 \
\hline 2 & 0.907 & 0.890 & 0.873 & 0.857 & 0.842 & 0.826 \
\hline 3 & 0.864 & 0.840 & 0.816 & 0.794 & 0.772 & 0.751 \
\hline 4 & 0.823 & 0.792 & 0.763 & 0.735 & 0.708 & 0.683 \
\hline 5 & 0.784 & 0.747 & 0.713 & 0.681 & 0.650 & 0.621 \
\hline
\end{array}$$ 
The investment meets the company's hurdle rate requirement and should be adopted.

Quizplus · Accepted Answer

The net present value of the investment is $10,460, which is greater than zero. This means that the investment is expected to generate a positive return, and therefore meets the company's hurdle rate requirement.

Allied Chemicals Has a Hurdle Rate of 9% for New