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 6%.

Option B $271,000 $80.200 Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A $175,000 $71,700 $29,900 $48,000 $0 $25,300 $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 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 $ %% Option B S % 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