12-3A (Part Level Submission)

Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 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 made of the cash flows. The companys cost of capital is 5%.

Option A

Initial cost$170,000

cash inflows$70,200

Annual cash outflows$30,700

Cost to rebuild (end of year 4) $49,000

Salvage value$0

Estimated useful life 7 years

Option B

Initial cost $293,000

Annual cash inflows $83,000

Annual cash outflows $25,600

Cost to rebuild (end of year 4) $0

Salvage value $7,800

Estimated useful life 7 years

(a)

Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint:To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.)(If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to 0 decimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 10.50.For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Net Present ValueProfitability IndexInternal Rate of Return

Option A$

Net Present Value

Profitability Index

Internal Rate of Return%

Option B$

Net Present Value?

Profitability Index?

Internal Rate of Return%?