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 4) Salvage value Estimated useful life Option A $170,000 $70,200 $30,700 $49.000 $0 Option B $293,000 $83,000 $25,600 $0 $7,800 7 years 7 years Click here to view the factor table. Your answer is partially correct. Try again. 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 retum, experiment with alterative 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 O 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 23,738.50 1.13 13.91 % Option B 44,682.80 1.15 8.61 S Vo LINK TO TEXT LINK TO VIDEO Your answer is correct. Which option should be accepted? Option By should be accepted