Problem 26-3A (Part Level Submission) Brooks Clinic is considering investing in
ID: 2589658 • Letter: P
Question
Problem 26-3A (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 6%. Option A Option B Initial cost $171,000 $269,000 Annual cash inflows $70,500 $81,500 Annual cash outflows $29,600 $27,000 Cost to rebuild (end of year 4) $48,900 $0 Salvage value $0 $7,100 Estimated useful life 7 years 7 years.
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.)
Explanation / Answer
Option A Option B Initial Cost -1,71,000 -2,69,000 Annual Inflow 70,500 81,500 Annual Outflow -29,600 -27,000 Net Annual Inflow 40,900 54,500 Cost to rebild after 4 years -48,900 - Salavge Value - 7,100 Life(Years) 7 7 CoC 6% 6% Year 0 1 2 3 4 5 6 7 NPV PI IRR Capital flow -1,71,000 -48,900 - Net Annual Inflow 40,900 40,900 40,900 40,900 40,900 40,900 40,900 Total Cash Flow -1,71,000 40,900 40,900 40,900 -8,000 40,900 40,900 40,900 Dis factor at 6% 1 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 Dis Cash Flow at 6% -1,71,000 38,585 36,401 34,340 -6,337 30,563 28,833 27,201 18,586 1.11 Dis factor at 9.0365% 1 0.91712 0.84112 0.77141 0.70748 0.64884 0.59507 0.54575 Dis Cash Flow at 9.0365% -1,71,000 37,510 34,402 31,551 -5,660 26,538 24,338 22,321 0 9.0365% Year 0 1 2 3 4 5 6 7 NPV Capital flow -2,69,000 7,100 Net Annual Inflow 54,500 54,500 54,500 54,500 54,500 54,500 54,500 Total Cash Flow -2,69,000 54,500 54,500 54,500 54,500 54,500 54,500 61,600 Dis factor at 6% 1 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 Dis Cash Flow at 6% -2,69,000 51,415 48,505 45,759 43,169 40,726 38,420 40,968 39,962 1.15 Dis factor at 9.9969% 1 0.90912 0.82649 0.75138 0.68309 0.62101 0.56457 0.51326 Dis Cash Flow at 9.9969% -2,69,000 49,547 45,044 40,950 37,228 33,845 30,769 31,617 0 9.9969% Option B should be preferred
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.