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%. Option A Option B Initial cost $176,000 $271,000 Annual cash inflows $71,700 $80,200 Annual cash outflows $29,900 $25,300 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,800 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.)
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%. Option A Option B Initial cost $176,000 $271,000 Annual cash inflows $71,700 $80,200 Annual cash outflows $29,900 $25,300 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,800 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.)
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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![**Problem 12-3A (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 6%.
| | Option A | Option B |
|------------------|----------|----------|
| Initial cost | $176,000 | $271,000 |
| Annual cash inflows | $71,700 | $80,200 |
| Annual cash outflows | $29,900 | $25,300 |
| Cost to rebuild (end of year 4) | $48,000 | $0 |
| Salvage value | $0 | $7,800 |
| 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 | | | |
| Option B | | | |
**Which option should be accepted?**
_________ should be accepted.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8fd09809-3074-4e95-9afc-d69809fe5b85%2F8ff97069-4545-4b7a-8302-cc8e52c8520b%2F6zertts_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Problem 12-3A (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 6%.
| | Option A | Option B |
|------------------|----------|----------|
| Initial cost | $176,000 | $271,000 |
| Annual cash inflows | $71,700 | $80,200 |
| Annual cash outflows | $29,900 | $25,300 |
| Cost to rebuild (end of year 4) | $48,000 | $0 |
| Salvage value | $0 | $7,800 |
| 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 | | | |
| Option B | | | |
**Which option should be accepted?**
_________ should be accepted.
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