Metz 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, Metz expects the machine to last another 8 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 10 years and have no residual value. Metz expects the following net cash inflows from the two options:

Metz 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 Metz choose?Why?

Transcribed Image Text:

Year Refurbish Current Machine $ 500,000 400,000 300,000 200,000 100,000 100,000 100,000 100,000 Purchase New Machine 700,000 600,000 500,000 400,000 300,000 300,000 300,000 300,000 300,000 300,000 4 10 Total 1,800,000 4,000,000