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 7%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A $155,000 $70,700 $32,000 $48,300 $0 7 years Option B $262,000 $80,400 $25,700 $0 $8,100 7 years
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 7%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A $155,000 $70,700 $32,000 $48,300 $0 7 years Option B $262,000 $80,400 $25,700 $0 $8,100 7 years
Cornerstones of Cost Management (Cornerstones Series)
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Chapter19: Capital Investment
Section: Chapter Questions
Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...
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![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.)
Option A
Option B
$
$
Net Present Value
Profitability Index
Internal Rate of Return
%
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8367d139-734a-41cb-baeb-856aa9ccbe82%2F2a86e140-82b4-47af-923a-18cfdfeb30fb%2Fbh9v7b_processed.png&w=3840&q=75)
Transcribed Image Text: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.)
Option A
Option B
$
$
Net Present Value
Profitability Index
Internal Rate of Return
%
%
![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 7%.
Initial cost
Annual cash inflows
Annual cash outflows
Cost to rebuild (end of year 4)
Salvage value
Estimated useful life
Option A
$155,000
$70,700
$32,000
$48,300
$0
7 years
Option B
$262,000
$80,400
$25,700
$0
$8,100
7 years](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8367d139-734a-41cb-baeb-856aa9ccbe82%2F2a86e140-82b4-47af-923a-18cfdfeb30fb%2Fh67fdd6_processed.png&w=3840&q=75)
Transcribed Image Text: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 7%.
Initial cost
Annual cash inflows
Annual cash outflows
Cost to rebuild (end of year 4)
Salvage value
Estimated useful life
Option A
$155,000
$70,700
$32,000
$48,300
$0
7 years
Option B
$262,000
$80,400
$25,700
$0
$8,100
7 years
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