Using payback, ARP, and
Learning Objectives 2, 4
1. Refurbish $19,810 NPV; Purchase 2.7 years payback
Henderson 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 $1,200,000. If refurbished, Henderson 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 $4,600,000. A new machine would last 10 years and have no residual value Henderson expects the following net
Year | Refurbish Current Machine | Purchase New Machine |
1 | $ 350,000 |
$ 3,780,000 |
2 | 340,000 | 510,000 |
3 | 270,000 | 440,000 |
4 | 200,000 | 370,000 |
5 | 130,000 | 300,000 |
6 | 130,000 | 300,000 |
7 | 130,000 | 300,000 |
8 | 130,000 | 300,000 |
9 | 300,000 | |
10 | 300,000 | |
Total | $ 1,680,000 | $ 6,900,000 |
Henderson uses straight-line depreciation and requires an annual return of 10%.
Requirements
- Compute the payback, the ARR,the NPV, and the profitability index of these two options
- Which option should Henderson choose?Why?
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Chapter 26 Solutions
Horngren's Accounting (12th Edition)
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