Compute the net present value profitability index

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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 5%.

 

Option A

Option B

Initial cost

$196,000

$291,000

Annual cash inflows

$72,500

$82,500

Annual cash outflows

$28,000

$25,600

Cost to rebuild (end of year 4)

$49,100

$0

Salvage value

$0

$8,500

Estimated useful life

7 years

7 years

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

Reference no: EM132490348

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