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 5%.

		Option A		Option B
Initial cost		$169,000		$291,000
Annual cash inflows		$70,400		$82,500
Annual cash outflows		$31,000		$25,400
Cost to rebuild (end of year 4)		$48,600		$0
Salvage value		$0		$7,200
Estimated useful life		7 years		7 years

Click here to view PV table.

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.)

		Net Present Value		Profitability Index		Internal Rate of Return
Option A		$				%
Option B		$				%

Which option should be accepted?

Option A or Option B

should be accepted