Question 9: Gilpin 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 $900 000. 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 $2.400,000. A new machine would last 10 years and have no residual value Gilpin expects the following net cash inflows from the two options: Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Refurbish Current Purchase New Machine Machine S 310,000 $ 1.560.000 380 000 570,000 290.000 480 000 200.000 390.000 110,000 300.000 110,000 300.000 110,000 300,000 110.000 300.000 300.000 300.000 5 1.620.000 5 4.800.000 Year 8 Year 9 Year 10 Total Gilpin uses straight-line depreciation and requires an annual return of 12%. 1. Compute the payback, the ARR the NPV, and the profitability index of these two options 2. Which option should Gilpin choose? 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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 Amount invested Net Cash Inflow Annual Accumulated Year 0 S 900.000 1 2 5 6 7 (Round your answer to one decimal place Yoan The payback for Option 1 (refurbish current machine) is Now complete the payback schedule for Option 2 (purchase). Net Cash Outflows Amount Invested s 2.400.000 Net Cash Inflows Annual Accumulated Year 0 1 5 6 7 9 10 Round your answer to one decimal place The payback for Option 2 purchase new machines yan Compute the ARR (accounting rate of return) for each of the options Average annual operating income Average amount invested ARR Refurbish Purchase Compute the NPV for each of the options. Begin with Option 1 (returbish) (Enter the factors to three decimal places xXxx Use parentheses or a minus sign for a negative net present value) Net Cash Inbow PV Factor 0-121 Present Value Years Present value of each year's 1 2 3 0122 31 4 4 5 5 3 2 Total PV of this Investment Nelsen alue of the pred Now compute the NPV for Option 2 (purchase). (Enter the factors to three decimal places. Xxxx Use parentheses or a minus sign for a negative net present value PV Factor Net Cash Infow Present Valo Years Present value of each years now * 1 2 3 4 5 ih in=5 2 10 net cash 10 --- Average and Total PV shows -2-agonal Operating IOWE 3. Initial Investments et rent value of the -A- Present Value of! Finally, compute the profitability index for each option (Round to two decimal places Xxx) OP in Hos Prinde Rub Parche Requirement 2. Which option should Gilpin choose? Why? -rew with the current machine OR PureMara now machine longer Gipin should choose because this option has a Dshorter payback period, an ARR that is the other option, a NPV, and its profitability index higher WA OR OR lower OR Positive OR Negatives