Pizza Palace has five brick ovens that need attention and is considering two options. Both options will cost around $1,000,000 (initial investment). 

Option 1 is to refurbish its current brick-ovens. If refurbished, Pizza Palace expects the ovens to last another 6 years. The average annual income from refurbishing the ovens is $183,333.33. Refurbishing the ovens will have no salvage value. 

Option 2 is to replace the current ovens. New ovens would last 8 years and have no salvage value. The average annual income from buying a new oven is $143,750. Pizza Palace expects the following net cash inflows from the two options:

Year	Refurbish Current Ovens	Purchase New Ovens
1	$600,000	$800,000
2	$500,000	$600,000
3	$400,000	$300,000
4	$300,000	$200,000
5	$200,000	$100,000
6	$100,000	$50,000
7		$50,000
8		$50,000

Pizza Palace uses straight-line depreciation and requires an annual return of 10%

Requirement:

1.  Calculate the payback, the ARR, the NPV, and profitability index for both options.

Answer rating: 100% (QA)

To calculate the payback period average accounting rate of return ARR net present value NPV and profitability index for both options we need to consid... View the full answer