Mandel 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 $2,200,000. If refurbished, Kilmer expects the machine to last another 8 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. Mandel expects the following net cash inflows from the two options:

Years	Refurbish Current Machine	Purchase New Machine
1	$1,720,000	$2,520,000
2	$430,000	$610,000
3	$320,000	$500,000
4	$210,000	$390,000
5	$100,000	$280,000
6	$100,000	$280,000
7	$100,000	$280,000
8	$100,000	$280,000
9		$280,000
10		$280,000
Total	$3,080,000	$5,700,000

Kilmer uses straight-line depreciation and requires an annual return of 14%.

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	$2,200,000	?	?
1		?	?
2		?	?
3		?	?
4		?	?
5		?	?
6		?	?
7		?	?
8		?	?

The payback for Option 1 (refurbish current machine) is _?___ years. (Round your answer to one decimal place.)

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

	Net Cash Outflows	Net Cash Inflows
Year	Amount Invested	Annual	Accumulated
0	$3,800,000
1		?	?
2		?	?
3		?	?
4		?	?
5		?	?
6		?	?
7		?	?
8		?	?
9		?	?
10		?	?

The payback for Option 2 (purchase new machine) is __?__years. (Round your answer to one decimal place.)

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

	?	/	?	=	ARR
Refurbish	?	/	?	=	?	%
Purchase	?	/	?	=	?	%

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 = 10%)		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					?

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 = 10%)		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				?

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

	?	/	?	=	Profitability index
Refurbish	?	/	?	=	?
Purchase	?	/	?	=	?

Requirement 2.

Which option should Kilmer choose? Why? Review your answers in Requirement 1.

Kilmer should choose__?_________because this option has a ___?_______ payback period, and ARR that is __?______ the other option, a ___?______ NPV, and its profitability index is ____?_____.