Answer to Question #303103 in Financial Math for Bliss

Question

Using payback, ARR, and NPV with unequal cash flows 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:

Answer 1

The initial investment, respectively, is the purchase of a new car and the amount to repair the old car. Next, we write down the amounts of income received from the purchase and repair options. We discount the income by years and find the net discounted income (add the discounted income by years and the initial investment with a minus) and the internal rate of return.

The rate is determined by the average income over the years divided by the initial investment.

Based on NPV and ARR calculations, more when you buy a new car