Problem 25-03A a-b (Video) (Part Level Submission)

Coronado 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%.

Problem 25-03A a-b (Vidco) (Part Lcvel Submission) Coronado 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 company's cost of capital is 5% Option A Option B $194,000 $291,000 72,600 $B2,000 528,100 $25,100 50 SO S9,000 7 years Initial cost Annual cash inlows Annual cash outflows Cost to rebuild (end of year 4) 5,200 Salvage value Estimated uscful life 7 years Computc the (1) nct present valuc, (2) profitability index, and (3) internal rate of rcturn for cach option, (Hint: To solvc for internal ratc of return, cxperiment with alternative discount rates to arrive at a nct present valuc of zcro.) (If the net present value is negative, use cither a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to 0 decimal places, eg. 125 and round profitability index to 2 derimal places, e.g. 13.50. For calculation purpases, use5 decimal places as displayed in the factor table provided.) Net Present Value Profitability Index Internal Rate of Reeturn Option A Option B Click if you would like to Show Work for this question: Opern Shaw Work