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 6%.

		Option A		Option B
Initial cost		$186,000		$277,000
Annual cash inflows		$72,200		$82,700
Annual cash outflows		$28,000		$26,800
Cost to rebuild (end of year 4)		$51,000		$0
Salvage value		$0		$8,600
Estimated useful life		7 years		7 years

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(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.)