Stratton Testing is considering investing in a new testing device. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 5 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were provided. The company€™s cost of capital is 9%.

Instructions
(a) Compute the
(1) Net present value, and
(2) Internal rate of return for each option.
(b) Which option should beaccepted?

Transcribed Image Text:

Option A Option B Initial cost Net annual cash flows Cost to rebuild (end of year 5) Salvage value Estimated useful life $90,000 $26,500 8 years $32,000 S0 $27,500 8 years value d of year 5) $20,000 $170 S0