Reference no: EM132469189

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                          $193,000             $288,000

Annual cash inflows               $72,700              $81,800

Annual cash outflows              $ 28,400            $25,400

Cost to rebuild (end of year 4 ) $51,500                  $0

Salvage value                           $0                      $7,000

Estimated useful life                 7 years                  7 years

Question 1: Compute the net present value, profitability index, and 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.)