Question
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 5%.
Round to 2 decimal places.
Option A Option B
Initial cost $193,000 $285,000
Annual cash inflows $72,900 $82,500
Annual cash outflows $28,700 $26,700
Cost to rebuild (end of year 4) $50,700 $0
Salvage value $0 $7,700
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.)
Net Present Value Profitability Index Internal Rate of Return
Option A $ %
Option B $ %
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