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Wildhorse Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require
Wildhorse 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 Option B Initial cost $167,000 $271,000 Annual cash inflows $71,700 $80,500 Annual cash outflows $31,500 $25,800 Cost to rebuild (end of year 4) $50,200 50 Salvage value $0 $8,300 Estimated useful life 7 years 7 years Click here to view PV table. (a) 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 O decimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
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