Carla Vista Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lowercost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but itsmaintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at theend of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 6%.Initial costAnnual cash inflowsAnnual cash outflowsCost to rebuild (end of year 4)Salvage valueEstimated useful lifeClick here to view PV table.Option A$183,000$72,800$29,200$51,800$07 yearsOption B$267,000$80,300$26,200$0$7,0007 years Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internalrate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value isnegative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to 0decimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places asdisplayed in the factor table provided.)Option AOption B$$LANet Present ValueProfitability IndexInternal Rate of Return%%

Net present value is determined by deducting the current value of cash flows from the initial…

Answered: Compute the (1) net present value, (2)…

Business

Finance

Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. ( ) (16+1

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 6P

See similar textbooks

Related questions

Q: What are the 4 basic option positions? Please draw their Profit/Loss Profile.

A: Option position means any open Long or short position in options derivatives. In options, we can buy…

Q: 1. The option is currently A. In-the-money B. At-the-money C. Out-the-money 2. Determine the…

A: An in-the-money option shows the option’s profitability equal to the difference between the market…

Q: : (b) Write a detailed note on Minimum Attractive Rate of Return.

A: The minimum attractive rate of return (MARR) is the affordable rate of return utilized in the choice…

Q: 1. The option is currently A. In-the-money B. At-the-money C. Out-the-money 2. Determine the…

A: Put options are those future contracts in which agreement is made for selling of stock or security…

Q: Problem 7 Market value of an ABC Inc. share 60 Exercise price for an ABC Inc. share 58 Time to…

A: A put option (also known as a "put") is a contract that allows the option buyer the right, but not…

Q: What is financial market equilibrium? And then explain its relation to required rate of return.

A: Financial market equilibrium: Financial market equilibrium is a condition in which money supply…

Q: at is the correct way to determine the value of a long forward position at expiration? The value is…

A: Foward contracts are that are settled in the future times and they are settled on the margins and…

Q: An efficient capital market is best defined as a market in which security prices reflect which one…

A: Efficient Capital Market: It is the market where all available information is reflected in asset…

Q: Determine the ff. 1. Call Option - Total Value 2. Call Option - Intrinsic Value 3. Call Option -…

A: The call option gives the buyer of the option the choice to purchase the underlying asset at the…

Q: Carla Vista Clinic is considering investing in new heart-monitoring equipment. It has two options.…

A: NPV represents the amount of value produced by a project and is estimated by taking the difference…

Q: Define each of the following terms: c. Net present value (NPV) method; internal rate of return (IRR)…

A: Net present value (NPV) is the contrast between the present value of money inflows over some…

Q: The following information relates to five stocks listed in five different sectors at the Nairobi…

A: we will calculate CAPM for given company stocks to determine the required rate of return here the…

Q: What is the Capital Asset Pricing Model (CAPM)? Derive the risk premium when beta is between 0 and…

A: Stock valuation is a quantitative approach that an analyst or management of the company undergoes…

Q: From the given table find the net present value. Thank you!

A: The present worth (NPV) is the distinction between the current worth of money inflows and the…

Q: A. Realized return B. Ex ante alpha C. Ex post alpha D. Realized beta Question 7 (MCQ) One example…

A: The question is multiple choice question. Required Choose the Correct Option.

Q: 8. How should internal rate of return be calculated in terms of Net Present Value?

A: For a given project, there is a cost incurred at the beginning. It is called the Initial cost of the…

Q: Compute for the: 1.) Call Option - Total Value 2.) Call Option - Intrinsic Value 3.) Call Option…

A: The question is based on the concept of valuation of an option contract. Total value is the market…

Q: Explain in words the following future- value formula: F₁ = P(1 + r)". n

A: Fn = P( 1 + r)n Where, Fn = Future Value after n time period P = Principal amount borrowed or…

Q: The future value interest factor is calculated as: Select one: O a. None of the other options are…

A: Future value: Dollar earned today is greater than dollar earned tomorrow. So, money in hand today…

Q: Select one:

A: All sorts of future cash flows in respect of adding interest on present value are known as future…

Q: (b) Derive the risk neutral expectation formula for the price of a derivative in the three-step…

A: Three Step bi-nominal Model: It was created in 1979, the binomial option pricing model, which is a…

Q: Consider the three stocks in the following table. P+ represents price at time t, and Qe represents…

A: Rate of return:The “rate of return” is a financial metric that represents the profit or gain…

Q: The internal rate of return equals the rate that yields a profitability index of 1 for an…

A: Internal rate of return is the rate at which the Present Value of Cash inflows is equal to the…

Q: Provide a descriptive formula for each of the following (e.g., Total risk =?+?): a. Total risk=…

Q: Define Concept about these topics 1.Payback method 2.Discounted payback method 3.Net present…

A: Payback period is a method used in capital budgeting which calculate the average recovery period by…

Q: Explain the following terms in the Capital Asset Pricing Model (CAPM): 1. Risk-Free Rate 2. Beta…

A: The Capital Asset Pricing Model (CAPM) is a mathematical model that expresses the relationship…

Q: Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is…

A: Risk free rate = 5% Expected return on market = 11% Beta of stock A = 0.7 Beta of stock B = 1.4

Q: The slope of the Security Market Line equals to ____, and the slope of Capital Allocation Line…

A: The security market line is how we represent the capital asset pricing model on a graph that shows…

Q: 1. The option is currently A. In-the-money B. At-the-money C. Out-the-money 2. Determine the…

A: Option contracts are one of the type of future contracts in which agreement is made for selling the…

Q: 1. The option is currently A. In-the-money B. At-the-money C. Out-the-money 2. Determine the…

A: An option considered in-the-money indicates that there is an opportunity to make a profit because of…

Q: Rm-Re is read as: O a. The return offered by the market over and above the risk-free rate O b.…

A: In finance, "return" typically refers to the profit or loss on an investment, usually expressed as a…

Q: The option is currently A. In-the-money B. At-the-money C. Out-the-money 2. Determine the…

A: Call option A call option provides its holder the right to buy a share at the pre-specified strike…

Question

Carla Vista 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
Annual cash inflows
Annual cash outflows
Cost to rebuild (end of year 4)
Salvage value
Estimated useful life
Click here to view PV table.
Option A
$183,000
$72,800
$29,200
$51,800
$0
7 years
Option B
$267,000
$80,300
$26,200
$0
$7,000
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. 12.50. For calculation purposes, use 5 decimal places as
displayed in the factor table provided.)
Option A
Option B
$
$
LA
Net Present Value
Profitability Index
Internal Rate of Return
%
%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction:

VIEW

Step 2: Computation of NPV, profitability index, and IRR:

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

D1. help with option A would be helpful it is incorrect
Internal Rate of Return is the discount rate that sets NPV to 0. True or false?
The NPV profile: O A. shows the payback period the point at which NPV is positive. O B. shows the internal rate of return the point at which NPV is zero. OC. shows the NPV over a range of discount rates. O D. B and C are correct.
Provide a descriptive formula for each of the following (e.g., Total risk =?+?): a. Total risk= b. Discount rate= c. Adjusted NPV=
please help me solve all completely and correctly with working . I want to understand the solution . Answer in text please not image .
I am struggling with these equations. Can you please help?
In calculating present value in a situation with a range of possible outcomes all discounted using the same interest rate, the expected present value would be the a.) most-likely outcome b.) sum of probability-weighted present value c.) maximum outcome d.) minimum outcome
A3)
Which of the following is not a variable in the basic present value equation? Multiple Choice Number of payments. Future value. Discount rate. Present value. Time horizon.
Rm-R is read as: O a. The return offered by the market over and above the risk-free rate O b. Market risk premium- Oc. Excess return on the market C. Od. All options are correct
Could you use formulas in order to get those answers, like the images I have attached to this follow-up questions?
1) Using the Black and Scholes formula, for each payoff compute the price, delta and probability of being exercised: 1a) A call, K=90, So=100, T=0.25, o=0.2 and r=0.01. 1b) A put, K=37, So=35, T=0.3, o=0.3 and r=0.02. 1c) A call, K=23, So=24, T=5 months, o=24% and r=2%. 1d) A call, K=95% of So, So=50, T=9 months, o=50% and r=3%. 1e) A put, K=97% of So, So=95, T=1 year, o=D30% and r=2%. 1f) An "at-the-money" straddle, So=95, T = 3 months, o=35% and r=2%.