Brooks Clinic is considering investing in new heart-monitoring equipment. It has Brooks Clinic is considering investing in new heart-monitoring equipment.

Brooks Clinic is considering investing in new heart-monitoring equipment. It has
Brooks Clinic is considering investing in new heart-monitoring equipment.

It has two options. Option Show more 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 companys cost of capital is 5%. Option A Option B Initial cost $196000 $291000 Annual cash inflows $72500 $82500 Annual cash outflows $28000 $25600 Cost to rebuild (end of year 4) $49100 $0 Salvage value $0 $8500 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. (Hint: To solve for internal rate of return experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is negative use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to 0 decimal places e.g. 125 and round profitability index to 2 decimal places e.g. 10.50. For calculation purposes use 5 decimal places as displayed in the factor table provided.) Show less

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