Problem 24-3A Brooks Clinic is considering investing in new hearl-monitoring equ

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Problem 24-3A Brooks Clinic is considering investing in new hearl-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 outlows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A Option B $193,000 S288,000 S72,700 S81.800 $28,400 $25.400 SO S0 S7,000 7 years 7 years $51,500 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 IAR to 0 decimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 10.50. 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 Option B Which option should be accepted? should be accepted Click if you would like to Show Work for this question: Question Attempts: Unlimited SAVE FOR LATER SUBMIT ANSWER

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Actual Actual Period PV 5% Option A Option B Option A Option B Initial Cost 0 1 -193000 -288000 -193000 -288000 Add: Annual Cash Flow 1-7 5.7864 72700 81800 420669 473325 Less: Annual Cash Outlow 1-7 5.7864 -28400 -25400 -164333 -146974 Less: Cost to rebuild 4 0.8227 -51500 0 -42369 0 Add: Salvage Value 7 0.7107 0 7000 0 4975 Net Present Value 20967 43326 Profitability Index=(PV of Cash Flow/Amount Invested) (20967+193000)/193000 1.11 (43326+288000)/288000 1.15 Internal Rate of Return (experiment with NPV=0) 8% 9% Projet A should be accepted considering Higher NPV and good PI Year PV at 5% 1 0.9524 2 0.9070 3 0.8638 4 0.8227 5 0.7835 6 0.7462 7 0.7107 5.7864

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