Problem 24-3A (Part Level Submission) Brooks Clinic is considering investing in
ID: 2529878 • Letter: P
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Problem 24-3A (Part Level Submission) 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 5%.
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Problem 24-3A (Part Level Submission) Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an întalower ost 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 capitals 5%. Option A Option B $194,000 $291,000 $72,600 $82,000 $28,100 $25,100 Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life $51,200 $0 $9,000 7 years 7 years ew PV tabl 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. 10.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) adie sign protabl provided.Explanation / Answer
Option A Option B Years Initial Out Flow Annual Cash Inflows Annual Cash out Flows Cost of rebuild Net Inflows Present Value Factor Present Value IRR 0 194,000.00 (194,000.00) 1 72,600.00 28,100.00 44,500.00 0.952380952 42,380.95 42,380.95 2 72,600.00 28,100.00 44,500.00 0.907029478 40,362.81 40,362.81 3 72,600.00 28,100.00 44,500.00 0.863837599 38,440.77 38,440.77 4 72,600.00 28,100.00 51,200.00 (6,700.00) 0.822702475 (5,512.11) (5,512.11) 5 72,600.00 28,100.00 44,500.00 0.783526166 34,866.91 34,866.91 6 72,600.00 28,100.00 44,500.00 0.746215397 33,206.59 33,206.59 7 72,600.00 28,100.00 44,500.00 0.71068133 31,625.32 31,625.32 215,371.00 2.86% NPV= Present Value of Inflows - Present Value of Outflows NPV= 215371-194000 NPV= 21,371.00 Profitability Index= Present Value of Future Inflows/Initial Out Flow Profitability Index= 215371/194000 Profitability Index= 1.11 IRR 2.86% Option B Years Initial Out Flow Annual Cash Inflows Annual Cash out Flows Net Inflows Present Value Factor Present Value IRR 0 291,000.00 (291,000.00) 1 82,000.00 25,100.00 56,900.00 0.952381 54,190.48 54,190.48 2 82,000.00 25,100.00 56,900.00 0.9070295 51,609.98 51,609.98 3 82,000.00 25,100.00 56,900.00 0.8638376 49,152.36 49,152.36 4 82,000.00 25,100.00 56,900.00 0.8227025 46,811.77 46,811.77 5 82,000.00 25,100.00 56,900.00 0.7835262 44,582.64 44,582.64 6 82,000.00 25,100.00 56,900.00 0.7462154 42,459.66 42,459.66 7 82,000.00 25,100.00 56,900.00 0.7106813 40,437.77 40,437.77 7 9,000.00 9,000.00 0.7106813 6,396.13 6,396.13 335,641.00 3.82% NPV= Present Value of Inflows - Present Value of Outflows NPV= 335641-291000 NPV= 44,641.00 Profitability Index= Present Value of Future Inflows/Initial Out Flow Profitability Index= 335641/291000 Profitability Index= 1.15 IRR 3.82%
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