Question
Sheffield 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
Sheffield 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%. Option A Option B Initial cost $193,000 $285,000 Annual cash inflows $72,900 $82,500 Annual cash outflows $28,700 $26,700 Cost to rebuild (end of year 4) $50,700 $0 Salvage value $0 $7,700 Estimated useful life 7 years 7 years
Compute net present value, profitabilty index, internal rate of return for each options. also explain which option should be choose?
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%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A Option B $193,000 $285,000 $72,900 $82,500 $28,700 $26,700 $50,700 $0 $0 $7,700 7 years 7 years
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