Managerial Accounting Chapter 11 question 2

More info The company is considering two options. Option 1 is to refurbish the current machine at a cost of $1,000,000. If refurbished, Colston 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 $4,800,000. A new machine would last 10 years and have no residual value. \fX Requirements i....... 1. Compute the payback, the ARR, the NPV, and the profitability index of these two options. 2. Which option should Colston choose? Why?Colston Manufacturing, Inc. has a manufacturing machine that needs attention. i (Click the icon to view additional information.) Colston expects the following net cash inflows from the two options: (Click the icon to view the net cash flows.) Colston uses straight-line depreciation and requires an annual return of 16%.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 O $ 1,000,000 2 (Round your answer to one decimal place.) The payback for Option 1 (refurbish current machine) is years.Now complete the payback schedule for Option 2 (purchase). Net Cash Outflows Net Cash Inflows Year Amount Invested Annual Accumulated O 4,800,000 2 60 00 - ) UT A 10 (Round your answer to one decimal place.) The payback for Option 2 (purchase new machine) is years.Compute the ARR (accounting rate of return) for each of the options. Refurbish Purchase + ARR % % 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 = 16%) Value Present value of each year's inow: 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 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 = 16%) Value Present value of each year's inow: (n = 1) (n = 2) (n = 3) (n = 4) (n = 5) (n = 6) (n = 7) (n = 8) (n = 9) _\\ (DMNQU'I-hwlx) _\\ O (n= 10) Total PV of cash inflows 0 Initial investment Net present value of the project Finally, compute the profitability index for each option. (Round to two decimal places X.XX.) = Profitability index Refurbish Purchase Requirement 2. Which option should Colston choose? Why? Review your answers in Requirement 1. Colston should choose because this option has a payback period, an ARR that is the other option, a VNPV, and its profitability index is