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 company's cost of capital is 6%. Option A $181,000 $73,000 $30,200 $48,000 Option B $283,000 $82,400 $25,100 Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life $0 $0 $8,300 7 years 7 years Click here to view the factor table. 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 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 Which option should be accepted? should be accepted. TABLE 1 Future Value of 1 4% 6% 11% 12% 15% Periods 0 1 1 2 3 1 1 1 1.00000 .04000 .08160 .12486 5% 1.00000 1.05000 1.10250 1.15763 1.00000 1.06000 1.12360 1.19102 7% .00000 1.07000 .14490 .22504 8% 1.00000 1.08000 1.16640 1.25971 9% 1.00000 1.09000 1.18810 1.29503 10% 1.00000 1.10000 1.21000 .33100 1.00000 1.11000 1.23210 1.00000 1.12000 1.25440 1.00000 1.15000 1.32250 1 1 1 1.36763 1.40493 1.52088 4 1.16986 1.21551 1.26248 1.31080 1.36049 1.41158 1.46410 1.51807 1.57352 1.74901 1 5 6 7 8 1 2 1.21665 1.26532 1.31593 1.36857 .42331 1.48024 1.27628 1.34010 1.40710 1.47746 1.55133 .62889 1.33823 1.41852 .50363 1.59385 1.68948 1.79085 .40255 1.50073 1.60578 1.71819 1.83846 1.96715 1.46933 1.58687 1.71382 1.85093 1.99900 2.15892 1.53862 1.67710 1.82804 1.99256 2.17189 2.36736 1.61051 1.77156 1.94872 .14359 .35795 2.59374 1.68506 1.87041 .07616 2.30454 .55803 2.83942 1.76234 1.97382 2.21068 2.47596 2.77308 3.10585 2.01136 2.31306 2.66002 3.05902 3.51788 4.04556 2 2 9 1 2 10 1 1 1 11 12 13 14 15 16 1.53945 .60103 .665071 1.73168 1.80094 1.87298 1.71034 1.79586 .88565 1.97993 2.07893 2.18287 1.89830 2 2.01220 2.132932 .26090 2 2.39656 2.54035 .10485 2 2.25219 .409852 .57853 2 2.75903 2.95216 .33164 2.51817 .71962 .93719 3.17217 3.42594 2.58043 2.81267 3.06581 3.34173 3.64248 3.97031 2.85312 3.15176 3.13843 3.49845 3.452273.88328 3.79750 4.31044 .17725 4.78459 .59497 5.31089 3.47855 3.89598 4.363496 4.88711 .47357 6.13039 9 4.65239 5.35025 .15279 7.07571 8.13706 .35762 2 5 4 4 17 1 .94790 2.29202 2 .69277 3.15882 3.70002 4.32763 5.05447 5 .895096 .86604 10.76126 3 5 18 19 20 2 2 2.02582 .10685 .19112 2.40662 2.52695 2.65330 2.85434 3.02560 3.20714 3.37993 3.61653 3.86968 .99602 4.31570 .66096 4.71712 5.14166 5.60441 .55992 6.11591 6.72750 6.54355 7.26334 8.06231 7.68997 8.61276 9.64629 12.37545 14.23177 1 6.36654 4 TABLE 2 Future Value of an Annuity of 1 Payments 4% 5% 6% 7% 8% 9% 10% 11% 12% 15% 1.00000 1.0000 1.00000 1.00000 1 1.00000 1.00000 2.04000 1.00000 2.05000 1.00000 2.09000 1.00000 2.10000 .00000 2.12000 2.06000 2.0700 2.08000 2.11000 2.15000 3 3.12160 3.15250 3.18360 3.2149 3 .24640 3.27810 3 .31000 3.34210 3 .37440 3.47250 4.24646 4.31013 4 .37462 4.4399 4.50611 4 .57313 4.64100 4.70973 4.77933 4 .99338 5 5 .416325.52563 5.637095.75075.86660 5.984716.105106.227806.352856 .74238 6 6 .63298 6.80191 6 .97532 7.1533 7.33592 7.52334 7.71561 7 .91286 8.11519 8.75374 8 8 7 8 9 10 7.898298 9.21423 10.58280 12.00611 .14201 9.54911 11.02656 12.57789 8.39384 9.89747 11.49132 13.18079 .6540 10.2598 11.9780 13.8164 .922809 10.63663 12.48756 14.48656 .20044 11.02847 13.02104 15.19293 9.48717 11.43589 13.57948 15.93743 9.78327 11.85943 14.16397 16.72201 10.08901 12.29969 14.77566 17.54874 11.06680 1 3.72682 16.78584 20.30372 11 12 13 14 15 16 17 18 19 20 13.48635 15.02581 16.62684 18.29191 20.02359 21.82453 23.69751 25.64541 2 7.67123 29.77808 14.20679 15.91713 17.71298 19.59863 21.57856 23.65749 2 5.84037 2 8.13238 30.53900 33.06595 14.97164 16.86994 18.88214 21.01507 23.27597 25.67253 28.21288 30.90565 33.75999 36.78559 15.7836 17.8885 20.1406 2 2.5505 25.1290 2 7.8881 30.8402 3 3.9990 37.3790 4 0.9955 16.64549 18.97713 21.49530 24.21492 27.15211 30.32428 33.75023 3 7.45024 41.44626 45.76196 17.56029 20.14072 22.95339 26.01919 29.36092 33.00340 36.97351 41.30134 46.01846 51.16012 18.53117 21.38428 2 4.52271 27.97498 3 1.77248 35.94973 4 0.54470 45.59917 51.15909 57.27500 19.56143 22.71319 26.21164 30.09492 34.40536 39.18995 44.50084 50.39593 5 6.93949 64.20283 20.65458 24.13313 28.02911 32.39260 37.27972 42.75328 48.88367 55.74972 6 3.43968 72.05244 24.34928 29.00167 34.35192 40.50471 47.58041 55.71747 65.07509 7 5.83636 88.21181 102.44358