Chapter 26, Problem 32AP

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

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