Chapter 26, Problem P26.31APGA

Using payback, ARR, and NPVwith unequal cash flows
Mandel 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 $1,100,000. I If refurbished, Mandel expects the machine to last another eight year and then have no residual value. Option 2 is to replace the machine at a cost of $2,200,000. A would last years and have no residual value. Mandel inflows from the two options:

Mandel uses straight-line depreciation and requires an annual return of 16%.

Requirements

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