Question:Brooks Clinic is considering investing in new heart-monitoring
equipment. It has two options. Option A would...
Question
Brooks Clinic is considering investing in new heart-monitoring
equipment. It has two options. Option A would...
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 5%.
Option A
Option B
Initial cost
$183,000
$281,000
Annual cash inflows
$70,000
$80,000
Annual cash outflows
$28,000
$25,000
Cost to rebuild (end of year 4)
$48,000
$0
Salvage value
$0
$7,000
Estimated useful life
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.)