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Sprocket Industries

Price: $2.99

Sprocket Industries is deciding whether to automate one phase of its production
process. The manufacturing equipment has a six-year life and will cost $905,000.
Projected net cash inflows are as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
$260,000 $254,000 $225,000 $215,000 $205,000 $173,000


1. Compute this project’s NPV using Sprocket’s 16% hurdle rate. Should Sprocket
invest in the equipment?

2. Sprocket could refurbish the equipment at the end of six years for $103,000. The
refurbished equipment could be used one more year, providing $75,000 of net
cash inflows in year 7. Additionally, the refurbished equipment would have a
$54,000 residual value at the end of year 7. Should Sprocket invest in the equipment
and refurbishing it after six years? (Hint: In addition to your answer to
Requirement 1, discount the additional cash outflow and inflows back to the
present value.

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