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 7%.

		Option A		Option B
Initial cost		$155,000		$262,000
Annual cash inflows		$70,700		$80,400
Annual cash outflows		$32,000		$25,700
Cost to rebuild (end of year 4)		$48,300		$0
Salvage value		$0		$8,100
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.) (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 Value		Profitability Index		Internal Rate of Return
Option A		$				%
Option B		$				%

TABLE 3 Present Value of 1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 15% 1 96154 95238 94340 93458 92593 91743 90909 90090 89286 .86957 2 9 2456 90703 .89000 .87344 85734 84168 .82645 .81162 79719 .75614 3 88900 .86384.83962 81630 79383 77218 75132 73119 71178 65752 4 85480 .82270 79209 .76290 73503 70843 68301 .65873.63552 57175 5 82193 78353 74726 71299 68058 64993 62092 59345 56743 49718 6 7 8 79031 .74622 70496 66634 63017 59627 5644753464 5066343233 75992 .71068 66506 .62275 58349 54703 51316 48166 45235 37594 73069 .67684 62741 58201 54027 50187 .46651 4339340388 32690 70259 .64461 59190 54393 50025 .46043.42410 39092 36061 28426 .67556 61391 55839 50835 46319 42241 38554 35218 32197 24719 9 10 11 .64958 58468 52679 47509 42888 38753 35049 31728 28748 21494 1262460 55684 49697 44401 39711 35554 31863 28584 25668 18691 13 6 0057 33032 .46884 .41496 36770 32618 28966 25751 22917 .16253 14 57748 .50507 44230 38782 34046 29923 26333 .23199 20462 14133 15 55526 .48102 .41727 36245 31524 27454 23939 20900 18270 12289 16 53391 .45811 39365 33873 29189 25187 21763 18829 16312 10687 17 51337 .43630 37136 31657 27027 23107 19785 .16963.14564 .09293 18 4 9363 41552 35034 29586 25025 21199 17986 15282 13004 .08081 1947464 3957333051 27615 23171 19449 16351 13768 11611 .07027 20 .45639 37689 31180 25842 21455 17843.14864 .12403 10367.06110 TABLE 4 Present Value of an Annuity of 1 Payments 1 2 3 4 5 4% 96154 1.88609 2.77509 3.62990 4.45182 5% 95238 1.85941 2.72325 3.54595 4.32948 6% 7% 8% 9% 10% 11% 12% 15% 94340 93458 9259391743 90909 90090 89286 86957 1.83339 1.80802 1.78326 1.75911 1.73554 1.71252 1.69005 1.62571 2.67301 2.62432 2.57710 2.53130 2.48685 2.44371 2.40183 2.28323 3.46511 3.38721 3.31213 3.23972 3.16986 3.10245 3.03735 2.85498 4.21236 4.10020 3.99271 3.88965 3.79079 3.69590 3.60478 3.35216 6 7 8 9 5.24214 5.07569 4.91732 4.76654 4.62288 4.48592 4.35526 4.23054 4.11141 3.78448 6.00205 5.78637 5.58238 5.38929 5.20637 5.03295 4.86842 4.71220 4.56376 4.16042 6.73274 6.46321 6.20979 5.97130 5.74664 5.53482 5.33493 5.14612 4.96764 4.48732 7.43533 7.10782 6.80169 6.51523 6.24689 5.99525 5.75902 5.53705 5.32825 4.77158 10 11 12 13 14 15 9 9 8.11090 7.72173 8.76048 8.30641 .38507 8.86325 .98565 9.39357 10.56312 9.89864 11.11839 10.37966 7.36009 7.02358 6.71008 6.41766 6.14457 5.88923 5.65022 5.01877 7.88687 7.49867 7.13896 6.80519 6.49506 6.20652 5.93770 5.23371 8.38384 794269 7.53608 7.16073 6.81369 6.49236 6.19437 5.42062 8.85268 8.35765 7.90378 7.48690 7.10336 6.74987 6.42355 5.58315 9.294988.74547 8.24424 7.78615 7.36669 6.98187 6.62817 5.72448 9.71225 9.10791 8.55948 8.06069 7.60608 7.19087 6.81086 5.84737 16 17 18 19 20 11.65230 10.83777 10.10590 9.44665 8.85137 8.31256 7.82371 7.37916 6.97399 5.95424 12.16567 11.27407 10.47726 9.76322 9.12164 8.54363 8.02155 7.54879 7.11963 6.04716 12.65930 11.68959 10.82760 10.05909 9.37189 8.75563 8.20141 7.70162 7.24967 6.12797 13.13394 12.08532 11.15812 10.33560 9.60360 8.95012 8.36492 7.83929 7.36578 6.19823 13.59033 12.46221 11.46992 10.59401 9.81815 9.12855 8.51356 7.96333 7.46944 6.25933