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?

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,