5/3/2020 Problem 25-03A a-b (Video) Print by: JIM HOWLEY SP2020 ACCT 2302- Lockett/ Chapter 25 *Problem 25-03A a-b (Video) 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 8%. Option A Option B Initial cost $160,000 $227,000 Annual cash inflows $71,000 $80,000 Annual cash outflows $30,000 $31,000 Cost to rebuild (end of year 4) $50,000 $0 Salvage value $0 $8,000 Estimated useful life 7 years 7 years Click here to view PV table. 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. 12.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net Present Value Profitability Index Internal Rate of Return Option A $. -24 203 Option B 64706 Which option should be accepted? should be accepted. 3.31213 3.312)3 41,000x 135,797,33 Question Attempts: 0 of 3 used 49000 x 3,3 Copyright 2000-2020 by John Wiley & Sons, Inc. or related companies. All rights reserved.
5/3/2020 Problem 25-03A a-b (Video) Print by: JIM HOWLEY SP2020 ACCT 2302- Lockett/ Chapter 25 *Problem 25-03A a-b (Video) 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 8%. Option A Option B Initial cost $160,000 $227,000 Annual cash inflows $71,000 $80,000 Annual cash outflows $30,000 $31,000 Cost to rebuild (end of year 4) $50,000 $0 Salvage value $0 $8,000 Estimated useful life 7 years 7 years Click here to view PV table. 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. 12.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net Present Value Profitability Index Internal Rate of Return Option A $. -24 203 Option B 64706 Which option should be accepted? should be accepted. 3.31213 3.312)3 41,000x 135,797,33 Question Attempts: 0 of 3 used 49000 x 3,3 Copyright 2000-2020 by John Wiley & Sons, Inc. or related companies. All rights reserved.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:5/3/2020
Problem 25-03A a-b (Video)
Print by: JIM HOWLEY
SP2020 ACCT 2302- Lockett/ Chapter 25
*Problem 25-03A a-b (Video)
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 8%.
Option A
Option B
Initial cost
$160,000
$227,000
Annual cash inflows
$71,000
$80,000
Annual cash outflows
$30,000
$31,000
Cost to rebuild (end of year 4)
$50,000
$0
Salvage value
$0
$8,000
Estimated useful life
7 years
7 years
Click here to view PV table.
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. 12.50. For calculation purposes, use 5 decimal places as displayed
in the factor table provided.)
Net Present Value Profitability Index
Internal Rate of Return
Option A
$.
-24 203
Option B
64706
Which option should be accepted?
should be accepted.
3.31213
3.312)3
41,000x 135,797,33
Question Attempts: 0 of 3 used
49000 x 3,3
Copyright 2000-2020 by John Wiley & Sons, Inc. or related companies. All rights reserved.
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