Crane 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		$176,000		$292,000
Annual cash inflows		$71,500		$82,400
Annual cash outflows		$30,400		$25,400
Cost to rebuild (end of year 4)		$51,100		$0
Salvage value		$0		$8,800
Estimated useful life		7 years		7 years

Click here to view the factor table.

(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		$enter a dollar amount rounded to 0 decimal places		enter the profitability index rounded to 2 decimal places		enter percentages rounded to 0 decimal places %
Option B		$enter a dollar amount rounded to 0 decimal places		enter the profitability index rounded to 2 decimal places		enter percentages rounded to 0 decimal places %

(b)

The parts of this question must be completed in order. This part will be available when you complete the part above.