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 company's cost of capital is 5%.

Option AOption BInitial cost$183,000$281,000Annual cash inflows$70,000$80,000Annual cash outflows$28,000$25,000Cost to rebuild (end of year 4)$48,000$0Salvage value$0$7,000Estimated useful life7 years7 years

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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. 12.50.For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Net Present ValueProfitability IndexInternal Rate of ReturnOption A$

%Option B$

%

Which option should be accepted?

Option A

Option B

should be accepted.