Gaynor 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 $1,600,000. If refurbished, Gaynor 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. Gaynor expects the following net cash inflows from the two options:

Gaynor 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 Gaynor choose? Why?

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Refurbish Current Machine Purchase New Machine Year 400,000 370,000 320,000 270,000 220,000 220,000 220,000 220,000 $2,700,000 450,000 400,000 350,000 300,000 300,000 300,000 300,000 300,000 300,000 5.700.000 4. 7 10 Total $2,240,000