Berens River Clinic is considering investing in new heart monitoring equipment. It has two options: Option A would have a lower initial cost but would require a significant expenditure for rebuilding after four years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of a higher initial quality, the clinic expects it to have a salvage value at the end of its useful life. The clinic made the following estimates:

Option A

Option B

Initial cost

$160,000

$227,000

Annual cash inflows

70,000

80,000

Annual cash outflows

30,000

26,000

Cost to rebuild (end of year 4)

50,000

0

Salvage value

0

8,000

Estimated useful life

7 years

7 years

The clinics cost of capital is 8%. Instructions

Calculate the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for the internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.) a. (1) NPV A: $11,503 (3) IRR B: 15% Determine which option the clinic should accept.

Calculate the net present value and internal rate of return with sensitivity analysis.