Reference no: EM132784764
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 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
Required - What is the (1) net present value, (2) profitability index, and (3) internal rate of return for each option?