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

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Refurbish Current Purchase New Machine Machine Year $ 350,000 $ 3,780,000 340,000 510,000 440,000 270,000 370,000 4 200,000 300,000 130,000 300,000 130,000 130,000 300,000 8. 130,000 300,000 300,000 300,000 10 $ 1,680,000 $ 6,900,000 Total 9,