Problem 25-03A

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%.

Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 1) Salvage value Estimated useful life Option A Option B $170,000 $293,000 $70,200 583,000 $30,700 $25,600 $19,000 $0 $7,800 7 years 7 years Click here to view the factor table. Compute the (1) net present value, (2) profitability index, and (3) intemal rate of return for each option. (Hint: To solve for internal rate of retum, 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 VIDEO Which option should be accepted? should be accepted. Click If you would like to Show Work for this question: Open Show Work LINK TO TEXT LINK TO VIDEO