Gilpin $$Manufacturing$,$ Inc. has a manufacturing machine that needs attention.

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Gilpin expects the following net cash inflows from the two$$ options:

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Gilpin uses$$ straight$-$line depreciation and requires an annual return of $14\%.$

$.$

$.$

$.$

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Part $1$

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Read the requirementsLOADING....

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Part $1$

Requirement $1.$ Compute the$$ payback, the$$ ARR, the$$ NPV$,$ and the profitability index of these two options.

Compute the payback for both options. Begin by completing the payback schedule for Option $1($refurbish$).$

Net Cash Outflows

Net Cash Inflows

Year

Amount Invested

Annual

Accumulated

$0$

$$1,100,000$

$1$

$2$

$3$

$4$

$5$

$6$

$7$

$8$

Part $2$

$($Round your answer to one decimal$$ place.$)$

The payback for Option $1($refurbish current machine$)$ is

years.

Part $3$

Now complete the payback schedule for Option $2($purchase$).$

Net Cash Outflows

Net Cash Inflows

Year

Amount Invested

Annual

Accumulated

$0$

$$1,500,000$

$1$

$2$

$3$

$4$

$5$

$6$

$7$

$8$

$9$

$10$

Part $4$

$($Round your answer to one decimal$$ place.$)$

The payback for Option $2($purchase new machine$)$ is

years.

Part $5$

Compute the ARR$($accounting rate of$$ return$)$ for each of the options.

$-$:

$=$

ARR

Refurbish

$-$:

$=$

$\%$

Purchase

$-$:

$=$

$\%$

Part $6$

Compute the NPV for each of the options. Begin with Option $1($refurbish$).($Enter the factors to three decimal places. X$.$XXX$.$ Use parentheses or a minus sign for a negative net present$$ value.$)$

Net Cash

PV Factor

Present

Years

Inflow

$($i $=14\%)$

Value

Present value of each year's inflow:

$1$

$($n $=1)$

$2$

$($n $=2)$

$3$

$($n $=3)$

$4$

$($n $=4)$

$5$

$($n $=5)$

$6$

$($n $=6)$

$7$

$($n $=7)$

$8$

$($n $=8)$

Total PV of cash inflows

$0$

Initial investment

Net present value of the project

Part $7$

Now compute the NPV for Option $2($purchase$).($Enter the factors to three decimal places. X$.$XXX$.$ Use parentheses or a minus sign for a negative net present$$ value.$)$

Net Cash

PV Factor

Present

Years

Inflow

$($i $=14\%)$

Value

Present value of each year's inflow:

$1$

$($n $=1)$

$2$

$($n $=2)$

$3$

$($n $=3)$

$4$

$($n $=4)$

$5$

$($n $=5)$

$6$

$($n $=6)$

$7$

$($n $=7)$

$8$

$($n $=8)$

$9$

$($n $=9)$

$10$

$($n $=10)$

Total PV of cash inflows

$0$

Initial investment

Net present value of the project

Part $8$

$$Finally$,$ compute the profitability index for each option. $($Round to two decimal places$$ X$.$XX$.)$

$-$:

$=$

Profitability index

Refurbish

$-$:

$=$

Purchase

$-$:

$=$

Part $9$

Requirement $2.$ Which option should Gilpin $$choose$?$ Why?

Review your answers in Requirement $1.$LOADING...

Gilpin should choose

$$

Option $1,$ refurbish the current machine

Option $2,$ purchase a new machine

because this option has a

$$

longer

shorter

payback$$ period, an ARR that is

$$

higher than

lower than

the same as

the other$$ option, a

$$

negative

positive

$$NPV$,$ and its profitability index is

$$

higher

lower

$.$

Gilpin should choosebecause this option has abecause this option has apayback period, an ARR that ispayback period, an ARR that isthe other option, athe other option, aNPV, and its profitability index isNPV, and its profitability index is$.$