Reference no: EM132957427

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                                        175000                      271000
Annual Cash inflows                              72100                       82400
Annual cash outflows                              29300                     25700
cost to rebuild (end of year 4)                     48700                         0
Salvage Value                                             0                          7200
Estimated useful life                                  7 years                     7 years

Problem 1: Compute the net present value for both options A &B

Problem 2: Determine profitability index, and the internal rate of return on each option.