Cullumber 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%. Option A Option B Initial cost $170,000 $293,000 Annual cash inflows $70.200 $83,000 Annual cash outflows $30,700 $25,600 Cost to rebuild (end of year 4) $49,000 $0 Salvage value $0 $7,800 Estimated useful life 7 years 7 years Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is egative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to O ecimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as isplayed in the factor table provided.) Net Present Value Option A $ Option B $ Profitability Index Internal Rate of Return % %
Cullumber 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%. Option A Option B Initial cost $170,000 $293,000 Annual cash inflows $70.200 $83,000 Annual cash outflows $30,700 $25,600 Cost to rebuild (end of year 4) $49,000 $0 Salvage value $0 $7,800 Estimated useful life 7 years 7 years Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is egative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to O ecimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as isplayed in the factor table provided.) Net Present Value Option A $ Option B $ Profitability Index Internal Rate of Return % %
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1eM
Related questions
Question
i need the answer quickly
Transcribed Image Text:Cullumber 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%.
Option A
Option B
Initial cost
$170,000
$293,000
Annual cash inflows
$70.200
$83,000
Annual cash outflows
$30,700
$25,600
Cost to rebuild (end of year 4)
$49,000
$0
Salvage value
$0
$7,800
Estimated useful life
7 years
7 years
Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internal
ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is
egative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to O
ecimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as
isplayed in the factor table provided.)
Net Present Value
Option A
$
Option B
$
Profitability Index
Internal Rate of Return
%
%
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 6 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub