Solution-Compute the net present value and profitability

Compute the net present value and profitability index

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Reference no: EM133174402

Question - 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	$170,000	$263,000
Annual cash inflows	$72,700	$82,000
Annual cash outflows	$30,500	$26,900
Cost to rebuild (end of year 4)	$51,800	$0
Salvage value	$0	$7,900
Estimated useful life	7 years	7 years

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

Reference no: EM133174402

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Compute the net present value and profitability index

Reference no: EM133174402

Reference no: EM133174402

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