Wildhorse 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 $167,000 $71,700 $31,500 $50,200 $0 7 years Option B $271,000 $80,500 $25,800 $0 $8,300 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
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a)
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
$
LA
ta
$
Net Present Value
Profitability Index
Intern
Transcribed Image Text:a) 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 $ LA ta $ Net Present Value Profitability Index Intern
Current Attempt in Progress
Wildhorse 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 the factor table.
Option A
$167,000
$71,700
$31,500
$50,200
$0
7 years
Option B
$271,000
$80,500
$25,800
$0
$8,300
7 years
Transcribed Image Text:Current Attempt in Progress Wildhorse 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 the factor table. Option A $167,000 $71,700 $31,500 $50,200 $0 7 years Option B $271,000 $80,500 $25,800 $0 $8,300 7 years
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