Compute the net present value and internal rate of return

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Reference no: EM131962217

Problem

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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 7%.

	Option A	Option B
Initial cost	$175,000	$271,000
Annual cash inflows	$72,100	$82,400
Annual cash outflows	$29,300	$25,700
Cost to rebuild (end of year 4)	$48,700	$0
Salvage value	$0	$7,200
Estimated useful life	7 years	7 years

(a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option.

Reference no: EM131962217

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