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Compute the net present value and profitability index

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Question - Carolina 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 11%.

Option A Option B

Initial cost $169,600 $240,620

Annual cash inflows $79,500 $84,800

Annual cash outflows $37,100 $31,800

Cost to rebuild (end of year 4) $63,600 $ 0

Salvage value $ 0 $12,720

Estimated useful life 8 years 8 years

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

Reference no: EM131800386

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