Hughes Manufacturing, Inc. has a manufacturing machine that needs attention. The company is considering two options. Option 1 is to refurbish the current machine at a cost of $2,600,000. If refurbished, Hughes expects the machine to last another eight years and then have no residual value. Option 2 is to replace the machine at a cost of $3,800,000. A new machine would last 10 years and have no residual value. Hughes expects the following net cash inflows from the two options:

Hughes uses straight-line depreciation and requires an annual return of 10%.
Requirements
1. Compute the payback, the ARR, the NPV, and the profitability index of these two options.
2. Which option should Hughes choose? Why?

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Refurbish Current Purchase New Machine Machine Year $ 1,760,000 $ 2,970,000 1 440,000 490,000 410,000 360,000 4 280,000 330,000 200,000 250,000 250,000 200,000 200,000 250,000 250,000 200,000 250,000 250,000 10 $ 5,700,000 $ 3,640,000 Total