Reference no: EM131633160
Problem - 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
Initial cost$170,000
cash inflows$70,200
Annual cash outflows$30,700
Cost to rebuild (end of year 4) $49,000
Salvage value$0
Estimated useful life 7 years
Option B
Initial cost $293,000
Annual cash inflows $83,000
Annual cash outflows $25,600
Cost to rebuild (end of year 4) $0
Salvage value $7,800
Estimated useful life 7 years
(a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option.