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%.

Initial cost- $181,000 $283,000

Annual cash inflows- $73,000 $82,400

Annual cash outflows- $30,200 $25,100

Cost to rebuild (end of year 4)- $48,000 $0

Salvage value- $0 $8,300

Estimated useful life- 7 years 7 years

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.) (b) Which option should be accepted?