Answered: Refurbish Current Purchase New Machine…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Using payback, ARR, and NPV with unequal cash flows

Henderson 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 $1,200,000. If refurbished, Henderson 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 $4,600,000. A new machine would last 10 years and have no residual value. Henderson expects the following net cash inflows from the two options:

Henderson uses straight-line depreciation and requires an annual return of 10%.

Requirements

Compute the payback, the ARR, the NPV, and the profitability index of these two options.
Which option should Henderson choose? Why?

Refurbish Current Purchase New
Machine
Year
Machine
$ 350,000
$ 3,780,000
340,000
510,000
270,000
440,000
200,000
370,000
130,000
300,000
6.
130,000
300,000
130,000
300,000
130,000
300,000
300,000
10
300,000
Total
$ 1,680,00
$6,900,000

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