Blossom 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 5%. Option A Option B Initial cost $183,000 $281,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $28,000 $25,000 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,000 Estimated useful life 7 years 7 years

Blossom 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 5%. Option A Option B Initial cost $183,000 $281,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $28,000 $25,000 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,000 Estimated useful life 7 years 7 years

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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