MandelMandel

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 $ 2,000,000. If refurbished, Mandel expects the machine to last another 88 years and then have no residual value. Option 2 is to replace the machine at a cost of $4,200,000. A new machine would last 1010 years and have no residual value. Mandel expects the following net cash inflows from the two options:

Year	Refurbish Current	Purchase New
	Machine	Machine
1	$1,300,000	$3,840,000
2	450,000	530,000
3	340,000	420,000
4	230,000	310,000
5	120,000	200,000
6	120,000	200,000
7	120,000	200,000
8	120,000	200,000
9		200,000
10		200,000
Total	$2,800,000	$6,300,000

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

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

(Round your answer to one decimal place.)

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

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	Net Cash Outflows	Net Cash Inflows
Year	Amount Invested	Annual	Accumulated
0	$4,200,000
1
2
3
4
5
6
7
8
9
10

(Round your answer to one decimal place.)

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

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		/		=	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.)

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		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

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.)

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		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

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

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		/		=	Profitability index
Refurbish		/		=
Purchase		/		=