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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
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 6%. Option A $183.000 Option B $267.000 Initial cost $72.800 $80,300 $29,200 $26,200 Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life $51.800 SO $0 $7,000 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 O 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 $ % Option B $ 6 %
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