Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option Awould have an initial lower cost but would require a significant
Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option Awould 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 company's cost of capital is 5% Option A Option B Initial cost $193,000 $285.000 Annual cash inflows $72.900 $82,500 Annual cash outflows $28.700 $26,700 Cost to rebuild (end of year 4) $50,700 $o Salvage value $0 $7,700 Estimated useful life 7 years 7 years Click here to view PV table. (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 decimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net Present Value Profitability Index Internal Rate of Return Option A $ 96 Option B $ %
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started