Reference no: EM132776085

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 6%.

initial cost                           Option A $189,000         Option B$277,000
Annual cash inflows               Option A$72,600             Option B$81,400
Annual cash outflows               Option A $28,100              Option B $25,200
Cost to rebuild (end of year 4)   Option A $49,600            option B 0
Salvage value                              Option A 0,                 Option B 7,300
Estimated useful life                   Option A 7 years                Option B 7 years

Problem 1: What is the net present value, profitability index, and internal rate of return for each option?