Question - SolarStar has decided to invest in a new robotic technology for solar energy equipment in their new solar-powered generators. They have been offered the following option by a large robotics manufacturer.
Cost: $15 million
SolarStar expects the following after-tax cash flows resulting from their ability to increase their prices and as well as their volume of future sales:
Year 1: $5 million
Year 2: $4 million
Year 3: $3 million
Year 4: $2 million
Year 5: $2 million
Year 6: $2 million
Year 7: $1 million
Year 8: $1 million
Year 9: $1 million
Answer the following questions based on the information given.
1. If their discount rate/required rate of return is 7%, what is the net present value of the purchase?
2. Should they purchase the technology?
3. What is the payback period?
4. If the criterion is that the project must pay back by 5 years, should the company purchase the technology?