Oriole 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 Option A $186,000 $72,200 $28,000 $51,000 $0 7 years Option B $277,000 $82,700 $26,800 $0 $8,600 7 years
Oriole 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 Option A $186,000 $72,200 $28,000 $51,000 $0 7 years Option B $277,000 $82,700 $26,800 $0 $8,600 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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Transcribed Image Text:Oriole 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
$186,000
$72,200
$28,000
$51,000
$0
7 years
Option B
$277,000
$82,700
$26,800
$0
$8,600
7 years
Transcribed Image Text: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 O 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
$
$
Net Present Value
20344
40774.61
Profitability Index
1.11
1.15
Internal Rate of Return
17.15 %
21.61 %
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