Mar Vista Molding Company is considering investing in new therrnokillian equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 3 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:

Option A

Option B

Initial cost

$53,000

$58,000

Annual cash inflows

$30,000

$30,000

Annual cash outflows

$15,000

$18,000

Cost to rebuild (end of year 3)

$12,000

$ -0-

Salvage value

S -0-

510,000

Estimated useful life

6 years

6 years

The company"s cost of capital is 8%.

Instructions

(a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option.

(b) Which option should be accepted?