(a) Goltra Clinic is considering investing in new heart-monitoring equipment. It
ID: 2726411 • Letter: #
Question
(a)
Goltra 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 8%.Option A Option B Initial cost $172,000 $249,000 Annual cash inflows $72,700 $80,800 Annual cash outflows $31,400 $25,200 Cost to rebuild (end of year 4) $50,300 $0 Salvage value $0 $8,400 Estimated useful life 7 years 7 years
Explanation / Answer
Calculation of NPV, PI for Option A Calculation of NPV, PI for Option B Year Cash Flows PVF@8% PV of Cashflows Year Cash Flows PVF@8% PV of Cashflows 0 -172000 1 -172000.00 0 -249000 1 -249000.00 1 41300 0.926 38240.74 1 55600 0.926 51481.48 2 41300 0.857 35408.09 2 55600 0.857 47668.04 3 41300 0.794 32785.27 3 55600 0.794 44137.07 4 -9000 0.735 -6615.27 4 55600 0.735 40867.66 5 41300 0.681 28108.09 5 55600 0.681 37840.43 6 41300 0.630 26026.01 6 55600 0.630 35037.43 7 41300 0.579 23920.96 7 64000 0.579 37068.80 NPV 5873.89 NPV 45100.91 Profitability Index = Sum of Discounted cash inflows/Sum of Discounted cash outflows Profitability Index = Sum of Discounted cash inflows/Sum of Discounted cash outflows 1.03 1.18 Calculation of IRR for Option A Calculation of IRR for Option B Year Cash Flows PVF@8% PV of Cashflows PVF@10% PV of Cashflows Year Cash Flows PVF@12% PV of Cashflows PVF@14% PV of Cashflows 0 -172000 1 -172000.00 1 -172000.00 0 -249000 1 -249000.00 1 -249000.00 1 41300 0.926 38240.74 0.909091 37545.45 1 55600 0.893 49642.86 0.877193 48771.93 2 41300 0.857 35408.09 0.826446 34132.23 2 55600 0.797 44323.98 0.769468 42782.39 3 41300 0.794 32785.27 0.751315 31029.30 3 55600 0.712 39574.98 0.674972 37528.42 4 -9000 0.735 -6615.27 0.683013 -6147.12 4 55600 0.636 35334.81 0.59208 32919.66 5 41300 0.681 28108.09 0.620921 25644.05 5 55600 0.567 31548.93 0.519369 28876.90 6 41300 0.630 26026.01 0.564474 23312.77 6 55600 0.507 28168.69 0.455587 25330.61 7 41300 0.579 23920.96 0.513158 21193.43 7 64000 0.452 28950.35 0.399637 25576.79 NPV 5873.89 -5289.88 NPV 8544.60 -7213.30 IRR 0.0905 IRR 0.1308 9.05% 13.08%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.