Sunland Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an in

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Sunland 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 the factor table.
(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
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
$enter a dollar amount rounded to 0 decimal places
enter the profitability index rounded to 2 decimal places
enter percentages rounded to 0 decimal places %
Option B
$enter a dollar amount rounded to 0 decimal places
enter the profitability index rounded to 2 decimal places
enter percentages rounded to 0 decimal places %