Compute the 1 net present value 2 profitability index and 3

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Reference no: EM13581348

Goltra 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 7%.

	Option A	Option B
Initial cost	$178,000	$252,000
Annual cash inflows	$71,300	$82,100
Annual cash outflows	$29,000	$26,000
Cost to rebuild (end of year 4)	$49,600	$0
Salvage value	$0	$8,600
Estimated useful life	7 years	7 years

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.)

	Net Present Value	Profitability Index	Internal Rate of Return
Option A	$		%
Option B	$		%

Reference no: EM13581348

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