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

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%.

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

Refurbish Current Machine Purchase New Machine Year 450,000 350,000 250,000 150,000 100,000 100,000 100,000 650,000 550,000 450,000 350,000 300,000 300,000 300,000 300,000 300,000 $ 3,500,000 4 Total $ 1,500,000