Hughes 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 $2,600,000. If refurbished, Hughes 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. Hughes expects the following net cash inflows from the two options:

Hughes 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 Hughes choose? Why?

Refurbish Current Purchase New Machine Machine Year $ 1,760,000 $ 2,970,000 1 440,000 490,000 410,000 360,000 4 280,000 330,000 200,000 250,000 250,000 200,000 200,000 250,000 250,000 200,000 250,000 250,000 10 $ 5,700,000 $ 3,640,000 Total