Sunny Days Corporation Is Deciding Whether to Automate One Phase

question 189

Multiple Choice

Sunny Days Corporation is deciding whether to automate one phase of its production process. The equipment has a six-year life and will cost $300,000. Projected net cash inflows from the equipment are as follows: Sunny Days Corporation's hurdle rate is 10%.
If Sunny Days Corporation decides to refurbish the equipment at a cost of $70,000 at the end of year 6, it could be used for one more year and would have a $50,000 residual value at the end of year 7. Assume the cash inflow in year 7 is $80,000. What is the NPV of just the refurbishment?
Present Value of $1
Present Value of Annuity of $1

• A)$(1560)
• B)$27,210
• C)$20,000
• D)$66,690

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