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Data table Gilpin Manufacturing, Inc. has a manufacturing machine that needs attention. (Click the icon to view additional information.) Gilpin expects the following net cash inflows from the two options: (Click the icon to view the net cash flows.) Gilpin uses straight-line depreciation and requires an annual return of 14%. ". Refurbish Current Machine Purchase New Machine Year Year 1 $ 140,000 $ 1,800,000 Year 2 More info 520,000 660,000 Year 3 380,000 520,000 Year 4 240,000 380,000 Year 5 The company is considering two options. Option 1 is to refurbish the current machine at a cost of $1,200,000. If refurbished, Gilpin 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 $3,200,000. A new machine would last 10 years and have no residual value. 100,000 100,000 100,000 240,000 240,000 Year 6 Year 7 240,000 100,000 Year 8 Year 9 240,000 240,000 240,000 Year 10 Print Done $ 1,680,000 $ 4,800,000 Total (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) Gilpin Manufacturing, Inc. has a manufacturing machine that needs attention. (Click the icon to view additional information.) Gilpin expects the following net cash inflows from the two options: E: (Click the icon to view the net cash flows.) Gilpin uses straight-line depreciation and requires an annual return of 14%. (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) 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 $ 1,200,000 1 140000 140000 2 520000 660000 3 380000 1040000 4 240000 1280000 5 100000 1380000 6 100000 1480000 7 100000 1580000 8 100000 1680000 (Round your answer to one decimal place.) The payback for Option 1 (refurbish current machine) is 3.125 years. Now complete the payback schedule for Option 2 (purchase). Net Cash Outflows Net Cash Inflows Year Amount Invested Annual Accumulated 0 $ 3,200,000 1 1800000 1800000 2 660000 2460000 3 520000 2980000 4 380000 3360000 5 240000 3600000 6 240000 3840000 7 240000 4080000 8 240000 4320000 9 240000 4560000 10 240000 4800000 (Round your answer to one decimal place.) The payback for Option 2 (purchase new machine) is 3.07 years. Compute the ARR (accounting rate of return) for each of the options. Average annual operating income Average amount invested ARR 35 % Refurbish Purchase = 30 % 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 1 (1200000) 140000 2 3 Present value of each year's inflow: (n = 1) (n = 2) (n = 3) (n = 4) (n = 5) (n = 6) 520000 380000 4 5 240000 6 100000 100000 7 (n = 7) 8 (n = 8) 100000 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 = 14%) Value 1 2 3 4 Present value of each year's inflow: (n = 1) (n = 2) (n = 3) (n = 4) (n = 5) (n = 6) (n = 7) (n = 8) (n = 9) 5 6 7 8 THE 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 Gilpin choose? Why? Review your answers in Requirement 1. Gilpin should choose NPV, and its profitability index is because this option has a payback period, an ARR that is the other option, a
