Medeiros 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 $ 1,000,000. If refurbished, Medeiros expects the machine to last another 7 years and then have no residual value. Option 2 is to replace the machine at a cost of $ 2,000,000. A new machine would last 9 years and have no residual value. Medeiros expects the following net cash inflows from the two options:

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

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

  • CreatedJanuary 16, 2015
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