Principle of Managerial Accounting Chapter 11 question 2

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%.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 Reference Present Value of $1 Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% 16% 18% 20% Period 1 0.990 | 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 0.870 0.862 0.847 0.833 Period 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.797 0.769 0.756 0.743 0.718 0.694 Period 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.712 0.675 0.658 0.641 0.609 0.579 Period 4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.636 0.592 0.572 0.552 0.516 0.482 Period 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.567 0.519 0.497 0.476 0.437 0.402 Period 6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.507 0.456 0.432 0.410 0.370 0.335 Period 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.452 0.400 0.376 0.354 0.314 0.279 Period 8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.404 0.351 0.327 0.305 0.266 0.233 Period 9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.361 0.308 0.284 0.263 0.225 0.194 Period 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.322 0.270 0.247 0.227 0.191 0.162 Period 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.287 0.237 0.215 0.195 0.162 0.135 Period 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.257 0.208 0.187 0.168 0.137 0.112 Period 13 |0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.229 0.182 0.163 0.145 0.116 0.093 Period 14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.205 0.160 0.141 0.125 0.099 0.078 Period 15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.183 0.140 0.123 0.108 0.084 0.065 Period 16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.163 0.123 0.107 0.093 0.071 0.054 Period 17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.146 0.108 0.093 0.080 0.060 0.045 Period 18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.130 0.095 0.081 0.069 0.051 0.038 Period 19 0.828 0.686 0.570 | 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.116 0.083 0.070 0.060 0.043 0.031 Period 20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.104 0.073 0.061 0.051 0.037 0.026Period 21 Period 22 Period 23 Period 24 Period 25 Period 26 Period 27 Period 26 Period 29 Period 30 Period 40 Period 50 0.811 0.660 0 .803 0 .795 0 .788 0 .780 0.772 0.764 0.757 0.749 0.742 0 .672 0 .608 0 .647 0 .634 0 .622 0 .61 0 0 .598 0 .586 0 .574 0 .563 0 .552 0 .453 0 .372 0.538 0.522 0.507 0.492 0.478 0.464 0.450 0.437 0.424 0 .41 2 0.307 0.228 0 .439 0 .422 0 .406 0 .390 0 .375 0.361 0.347 0.333 0.321 0.308 0.208 0.141 0.359 0.342 0.326 0.310 0.295 0.281 0.268 0.255 0.243 0.231 0.142 0.087 0.294 0.278 0.262 0.247 0.233 0.220 0.207 0.196 0.185 0.174 0.097 0.054 0.242 0.226 0.211 0.197 0.184 0.172 0.161 0.150 0.141 0.131 0.067 0.034 0.199 0.184 0.170 0.158 0.146 0.135 0.125 0.116 0.107 0.099 0.046 0.021 0.164 0.150 0.138 0.126 0.116 0.106 0.098 0.090 0.082 0.075 0.032 0.013 0.135 0.123 0.112 0.102 0.092 0.084 0.076 0.069 0.063 0.057 0.022 0.009 0 .093 0 .083 0 .074 0 .066 0 .059 0 .053 0 .047 0 .042 0 .037 0 .033 0.011 0.003 0 .064 0 .056 0 .049 0 .043 0 .038 0 .033 0 .029 0 .026 0 .022 0 .020 0 .005 0 .001 0.053 0.046 0.040 0.035 0.030 0.026 0.023 0.020 0.017 0.015 0.004 0.001 0.044 0.038 0.033 0.028 0.024 0.021 0.018 0.016 0.014 0.012 0.003 0.001 0.031 0.026 0.022 0.019 0.016 0.014 0.011 0.010 0.008 0.007 0.001 0.022 0.018 0.015 0.013 0.010 0.009 0.007 0.006 0.005 0.004 0.001 \fPeriod 21 Period 22 Period 23 Period 24 Period 25 Period 26 Period 27 Period 28 Period 29 Period 30 Period 40 Period 50 18.857 19.660 20.456 21 .243 22.023 22.795 23.560 24.316 25.066 25.808 32.835 39.196 17.011 17.658 18.292 18.914 19.523 20.121 20.707 21 .281 21 .844 22.396 27.355 31 .424 15.415 15.937 16.444 16.936 17.413 17.877 18.327 18.764 19.188 19.600 23.115 25.730 14.029 14.451 14.857 1 5.247 1 5.622 1 5.983 16.330 16.663 16.984 1 7.292 19.793 21.482 12.821 11.764 10.836 13.163 12.042 11.061 13.489 12.303 11.272 13.799 12.550 11.469 14.094 12.783 11.654 14.375 13.003 11.826 14.64313.211 11.987 14.898 13.406 12.137 15.141 13.591 12.278 15.372 13.765 12.409 17.159 15.046 13.332 18.256 15.762 13.801 10.017 10.201 10.371 10.529 10.675 10.810 10.935 11.051 11.158 11.258 11 .925 12.233 9 .292 9 .442 9 .580 9 .707 9 .823 9.929 10.027 10.116 10.198 10.274 10.757 10.962 8.649 8.772 8.883 8.985 9.077 9.161 9.237 9.307 9.370 9.427 9.779 9.915 7.562 7.645 7.718 7.784 7.843 7.896 7.943 7.984 8.022 8.055 8.244 8.304 6 .687 6 .743 6 .792 6 .835 6 .873 6 .906 6 .935 6 .961 6 .983 7 .003 7.105 7.133 6.312 6.359 6.399 6.434 6.464 6.491 6.514 6.534 6.551 6.566 6.642 6.661 5.973 6.011 6.044 6.073 6.097 6.118 6.136 6.152 6.166 6.177 6.233 6.246 5.384 5.410 5.432 5.451 5.467 5.480 5.492 5.502 5.510 5.517 5.548 5.554 4.891 4.909 4.925 4.937 4.948 4.956 4.964 4.970 4.975 4.979 4.997 4.999 X Reference E........ Future Value of $1 Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% Period 1 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.090 1.100 1.120 1.140 1.150 Period 2 1.020 1.040 1.061 1.082 1.103 1.124 1.145 1.166 1.188 1.210 1.254 1.300 1.323 Period 3 1.030 1.061 1.093 1.125 1.158 1.191 1.225 1.260 1.295 1.331 1.405 1.482 1.521 Period 4 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360 1.412 1.464 1.574 1.689 1.749 Period 5 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.469 1.539 1.611 1.762 1.925 2.011 Period 6 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.677 1.772 1.974 2.195 2.313 Period 7 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828 1.949 2.211 2.502 2.660 Period 8 1.083 1.172 1.267 1.369 1.477 1.594 1.718 1.851 1.993 2.144 2.476 2.853 3.059 Period 9 1.094 1.195 1.305 1.423 1.551 1.689 1.838 1.999 |2.172 2.358 2.773 3.252 3.518 Period 10 1.105 1.219 1.344 1.480 1.629 1.791 1.967 2. 159 2.367 2.594 3.106 3.707 4.046 Period 11 1.116 1.243 1.384 1.539 1.710 1.898 2.105 2.332 2.580 2.853 3.479 4.226 4.652 Period 12 1.127 1.268 1.426 1.601 1.796 2.012 2.252 2.518 2.813 3.138 3.896 4.818 5.350 Period 13 1.138 1.294 1.469 1.665 1.886 2.133 2.410 2.720 3.066 3.452 4.363 5.492 6.153 Period 14 1.149 1.319 1.513 1.732 1.980 2.261 2.579 2.937 3.342 3.798 4.887 6.261 7.076 Period 15 1.161 1.346 1.558 1.801 2.079 2.397 2.759 3.172 3.642 4.177 5.474 7.138 8.137 Period 16 1.173 1.373 1.605 1.873 2.183 2.540 2.952 3.426 3.970 4.595 6.130 8.137 9.358 Period 17 1.184 1.400 1.653 1.948 2.292 2.693 3.159 3.700 4.328 5.054 6.866 9.276 10.76 Period 18 1.196 1.428 1.702 2.026 2.407 2.854 3.380 3.996 | 4.717 5.560 7.690 10.58 12.38 Period 19 1.208 1.457 1.754 2. 107 2.527 3.026 3.617 4.316 5.142 6.116 8.613 12.06 14.23 Period 20 1.220 1.486 1.806 2. 191 2.653 3.207 3.870 4.661 5.604 6.727 9.646 13.74 16.37Period 21 Period 22 Period 23 Period 24 Period 25 Period 26 Period 27 Period 28 Period 29 Period 30 Period 40 Period 50 1 .232 1 .245 1 .257 1 .270 1 .282 1 .295 1 .308 1 .321 1 .335 1 .348 1 .489 1 .645 1 .516 1 .546 1 .577 1 .608 1 .641 1 .673 1 .707 1 .741 1 .776 1.811 2.208 2.692 1 .860 1 .916 1 .974 2.033 2.094 2.157 2.221 2.288 2.357 2.427 3.262 4.384 2.279 2.370 2.465 2.563 2.666 2.772 2.883 2.999 3.119 3.243 4.801 7.107 2.786 2.925 3.072 3.225 3.386 3.556 3.733 3.920 4.116 4.322 7.040 11.47 3.400 3.604 3.820 4.049 4.292 4.549 4.822 5.112 5.418 5.743 10.29 18.42 4.141 4.430 4.741 5.072 5.427 5.807 6.214 6.649 7.114 7.612 14 .97 29.46 5.034 5.437 5.871 6.341 6.848 7.396 7.988 8.627 9.317 10.06 21 .72 46.90 6.109 6.659 7.258 7.911 8.623 9.399 10.25 11.17 12.17 13.27 31 .41 74.36 7.400 8.140 8.954 9.850 1 0 .83 11.92 13.11 14.42 15.86 17.45 45.26 117.4 10.80 12.10 13.55 15.18 17.00 1 9 .04 21 .32 23.88 26.75 29.96 93.05 289.0 1 5.67 1 7.86 20.36 23.21 26.46 30 .1 7 34.39 39.20 44.69 50.95 188.9 700.2 18 .82 21 .64 24.89 28.63 32.92 37.86 43.54 50.07 57.58 66.21 267.9 1.084 ........ X Reference Future Value of Ordinary Annuity of $1 Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 15% Period 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 Period 2 2.010 2.020 2.030 2.040 2.050 2.060 2.070 2.080 2.090 2. 100 2.120 2.140 2.150 Period 3 3.030 3.060 3.091 3.122 3.153 3.184 3.215 3.246 3.278 3.310 3.374 3.440 3.473 Period 4 4.060 4.122 4.184 4.246 4.310 4.375 4.440 4.506 4.573 4.641 4.779 4.921 4.993 Period 5 5.101 5.204 5.309 5.416 5.526 5.637 5.751 5.867 5.985 6.105 6.353 6.610 6.742 Period 6 6.152 6.308 6.468 6.633 6.802 6.975 7.153 7.336 7.523 7.716 8. 115 8.536 8.754 Period 7 7.214 7.434 7.662 7.898 8.142 8.394 8.654 8.923 9.200 9.487 10.09 10.73 11.07 Period 8 8.286 8.583 8.892 9.214 9.549 9.897 10.260 10.64 11.03 11.44 12.30 13.23 13.73 Period 9 9.369 9.755 10.16 10.58 11.03 11.49 11.98 12.49 13.02 13.58 14.78 16.09 16.79 Period 10 10.46 10.95 11.46 12.01 12.58 13.18 13.82 14.49 15.19 15.94 17.55 19.34 20.30 Period 11 11.57 12.17 12.81 13.49 14.21 14.97 15.78 16.65 17.56 18.53 20.65 23.04 24.35 Period 12 12.68 13.41 14.19 15.03 15.92 16.87 17.89 18.98 20.14 21.38 24.13 27.27 29.00 Period 13 13.81 14.68 15.62 16.63 17.71 18.88 20.14 21.50 22.95 24.52 28.03 32.09 34.35 Period 14 14.95 15.97 17.09 18.29 19.60 21.02 22.55 24.21 26.02 27.98 32.39 37.58 40.50 Period 15 16.10 17.29 18.60 20.02 21.58 23.28 25.13 27.15 29.36 31.77 37.28 43.84 47.58 Period 16 17.26 18.64 20.16 21.82 23.66 25.67 27.89 30.32 33.00 35.95 42.75 50.98 55.72 Period 17 18.43 20.01 21.76 23.70 25.84 28.21 30.84 33.75 36.97 40.54 48.88 59.12 65.08 Period 18 19.61 21.41 23.41 25.65 28.13 30.91 34.00 37.45 41.30 45.60 55.75 68.39 75.84 Period 19 20.81 22.84 25.12 27.67 30.54 33.76 37.38 41.45 46.02 51.16 63.44 78.97 88.21 Period 20 22.02 24.30 26.87 29.78 33.07 36.79 41.00 45.76 51.16 57.28 72.05 91.02 102.4Period 21 Period 22 Period 23 Period 24 Period 25 Period 26 Period 27 Period 28 Period 29 Period 30 Period 40 Period 50 23.24 24.47 25.72 26.97 28.24 29.53 30.32 32 .1 3 33.45 34.78 48.39 64.46 25.78 27.30 28.35 30.42 32.03 33.67 35.34 37.05 38.79 40.57 60.40 28.63 30.54 32.45 34.43 36.46 38.55 40.71 42.93 45.22 47.53 75.40 31 .97 34.25 36.62 39.03 41 .65 44.31 47.03 49.97 52.97 56.03 95.03 84.53 112.8 152.7 35.72 38.51 41 .43 44.50 47.73 51 .11 54.67 58.40 62.32 66.44 120.3 209.3 39.99 43.39 47.00 50.82 54.86 59.16 63.71 68.53 73.64 79.06 154.3 290.3 44.37 49.01 53.44 58.18 63.25 68.68 74.48 80.70 87.35 94.46 199.6 406.5 50.42 55.46 60.39 66.76 73.1 1 79.95 87.35 95.34 104.0 113.3 259.1 573.3 56.76 62.37 69.53 76.79 84.70 93.32 102.7 113.0 124.1 136.3 337.9 815.1 64.00 71 .40 79.54 88.50 98.35 109.2 121.1 134.2 148.6 164.5 442.6 1,164 81.70 92.50 104.6 118.2 133.3 150.3 169.4 190.7 214.6 241.3 767.1 2,400 104.8 120.4 138.3 158.7 181.9 208.3 238.5 272.9 312.1 356.8 1.342 4,995 118.8 137.6 159.3 184.2 212.3 245.7 283.6 327.1 377.2 434.7 1.779 7,213 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 $ 1,000,000 N VOU A W 8 (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 N 6 00 ~ ) OF A W 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.+ = 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 Inow (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) Total PV of cash inows WNUDUI-bOJN-K 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 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 projectFinally, 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 NPV, and its profitability index is