Question

P26-31A Using payback, ARR, and NPV with unequal c Mandel Manufacturing, Inc has a manufácturing machine that needs attention. The company is considering two options. Opion 1 is to refurbish the current machine at a cost of $1,100,000. If refurbished, Mandel expects years and then have no residual value. Option 2 is to replace the machine at a cost of the machine to last another eight $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 opions: Refurbish Current Purhae New Year Machine S 280,000 500,000 380,000 260,000 40,000 140,000 40,000 40,000 s 260,000 740,000 620,000 500,000 380,000 380,000 380,000 380,000 380,000 80,000 4.400.000 Total 1,980,000 Mandel uses straight-line depreciation and requires an annual return of 16%, Requirements I. Compute the payback, the ARR, the NPV, and the profitability index of these two 2. Which option should Mandel choose? Why'

Answer 1

Option 1) Calculation of NPV of Refurbish of Current Machine Option 2) Calculation of NPV of New Machine Discount Cash Outflow-. YearRefurbish Cost(A) Present Value of Cash Flow Inflow/ (Outflow) Discount Factor @16%-(D) Present Value of Cash Flow (A*B) Cash Inflow (B) Factor @16%.(D) New Machine Cash Inflow (B) Year (Outflow) (1,100,000) (1,100,000) 1.000000 1,100,000.00) (2,200,000) 1.000000 (2,200,000.00) 280,000 0.862069 241,379.32 0.743163 371,5815o 0.640658 243,450.04 260,000 0.552291 143,595.66 140,000 0.476113 66,655.82 57,461.88 0.353830 49,536.20 42,703.50 260,000 0.862069 224,137.94 0.743163 549,940.62 620,000 0.640658 397,207.96 0.552291 276,145.50 0.476113 180,922.94 0.410442 155,967.96 0.353830 134,455.40 380,000 0.305025 115,909.50 0.262953 99,922.14 0.226684 86,139.92 20,749.88 2 500,000 620,000 500,000 380,000 380,000 380,000 500,000 0.410442 0.305025 Project Net Present Value @16% Project Net Present Value @16% Average Investment Calculation of ARR% Total Cash Flows (A) Useful Life (B) Average Cash Flow (A/B) Investment Refurbish Current Machine New Machine 1,980,000 247,500 8 1,100,000 22.50% 2,200,000 20.00% NPV of the Profitability Index Pro Refurbish Current Machine New Machine 2) Mandel should choose Refurbish of the current machine as it has higher NPV ($116,363) and also a higher Profitability Index (1.11) ment pr 1,100,000.0 116,363.9 2,200,000.0 20,749.9

Disount Factor tabel at 16% (rounded to 6 decimal) Year 0 Discount Factor Workings 1000000 0.862069 0.743163 1/1+.16) 0.640658 1/1+16) 0.552291 1/1+.16) 0.476113 1/(1+.16) 0.4104421/(1+.16) 0.353830 .305025 1/116) 0.262953 /16) 0.226684 10 10