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.
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.
  The investment meets the company's hurdle rate requirement and should be adopted.

Quizplus · Accepted Answer

The net cash flows for each year can be discounted using a discount rate of 9% to calculate the present value of the investment. The present value of the net cash flows is greater than the cost of the equipment upgrade, indicating that the investment will yield a positive net present value and should be adopted.

Allied Chemicals Has a Hurdle Rate of 9% for New