Concept explainers
Hughes 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 $2,600,000. If refurbished, Hughes 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 $3,800,000. A new machine would last 10 years and have no residual value. Hughes expects the following net
Hughes uses straight-line depreciation and requires an annual return of 10%.
Requirements
- 1. Compute the payback, the ARR, the
NPV , and the profitability index of these two options. - 2. Which option should Hughes choose? Why?
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