Sandhill 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%.Option AOption BInitial cost$170,000$274,000Annual cash inflows$72,200$82,200Annual cash outflows$31,400$26,700Cost to rebuild (end of year 4)$50,100$0Salvage value$0$8,200Estimated useful life7 years7 yearsClick here to view PV table.(a)* Your answer is incorrect.Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internalrate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value isnegative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to Odecimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places asdisplayed in the factor table provided.)Profitability IndexInternal Rate of Return285849.891.6820612.74%Net Present ValueOption A$Option B$384331.631.4024513.82%

Capital budgeting:Capital budgeting facilitates prudent resource allocation, ensuring that limited…

Sandhill 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 Annual cash inflows $170,000 $274,000 $72,200 $82,200 Annual cash outflows $31,400 $26.700 Cost to rebuild (end of year 4) $50,100 $0 Salvage value $0 $8.200 Estimated useful life 7 years 7 years

Sandhill 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 Annual cash inflows $170,000 $274,000 $72,200 $82,200 Annual cash outflows $31,400 $26.700 Cost to rebuild (end of year 4) $50,100 $0 Salvage value $0 $8.200 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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Cullumber 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%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Click here to view the factor table. (a) Your answer is partially correct. Option A Option A $170,000 $70,200 $30,700 $49,000 Option B $ $0 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…
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Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The cash flows associated with each are shown in the following table attached: . The firm's cost of capital is 10%. a. Calculate the net present value (NPV) of each press. b. Using NPV, evaluate the acceptability of each press. c. Rank the presses from best to worst using NPV.
Dwight Donovan, the president of Walton Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation: the machine is expected to have a useful life of four years and no salvage value. Project 8 supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $102,000 and for Project B are $33,000. The annual expected cash inflows are $32,178 for Project A and $10,865 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Walton Enterprises' desired rate of return is 4 percent. (PV of $1 and PVA of $1 ) (Use appropriate foctor(s) from the tables provided.) Required o. Compute the net present value of each project. Which project should be adopted based on the net present value approach? b. Compute the approximate…
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