Answer Happy

Brooks 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 $186,000 $277,000 Annual cash inflows $72,200 Annual cash outflows $28,000 Cost to rebuild (end of year 4) $51,000 Salvage value $0 Estimated useful life 7 years $82,700, $26,800 $0 $8,600 7 years