Answered step by step
Verified Expert Solution
Link Copied!
Question
1 Approved Answer

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 companys cost of capital is 8%.
Option A Option B
Initial cost $160,000 $227,000
Annual cash inflows $71,000 $80,000
Annual cash outflows $30,000 $31,000
Cost to rebuild (end of year 4) $50,000 $0
Salvage value $0 $8,000
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.) (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 $

%

LINK TO TEXT

LINK TO TEXT

LINK TO TEXT

Which option should be accepted?

Option AOption B

should be accepted.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image
Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Information Systems Control And Audit

Authors: Ron Weber

1st Edition

0139478701, 978-0139478703

More Books

Students also viewed these Accounting questions