Mandel 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 $1,100,000. If refurbished, Mandel 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 $2,200,000. A new machine would last 10 years and have no residual value. Mandel expects the following net cash inflows from the two options:

Mandel uses straight-line depreciation and requires an annual return of 16%.
Requirements
1. Compute the payback, the ARR, the NPV, and the profitability index of these two options.
2. Which option should Mandel choose? Why?

Refurbish Current Machine Purchase New Machine Year 280,000 500,000 380,000 260,000 140,000 140,000 140,000 140,000 S 260,000 740,000 620,000 500,000 380,000 380,000 380,000 380,000 380,000 380,000 4400.000 4. 10 Total 1,980,000