Sandhill Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lowercost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but itsmaintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at theend of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 6%.Option AOption BInitial cost$170,000$274,000Annual cash inflows$72,200$82,200Annual cash outflows$31,400$26,700Cost to rebuild (end of year 4)$50,100$0Salvage value$0$8,200Estimated useful life7 years7 yearsClick here to view PV table.(a)* Your answer is incorrect.Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for internalrate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value isnegative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to Odecimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places asdisplayed in the factor table provided.)Profitability IndexInternal Rate of Return285849.891.6820612.74%Net Present ValueOption A$Option B$384331.631.4024513.82%

Capital budgeting:Capital budgeting facilitates prudent resource allocation, ensuring that limited…

Sandhill 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 Annual cash inflows $170,000 $274,000 $72,200 $82,200 Annual cash outflows $31,400 $26.700 Cost to rebuild (end of year 4) $50,100 $0 Salvage value $0 $8.200 Estimated useful life 7 years 7 years

Sandhill 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 Annual cash inflows $170,000 $274,000 $72,200 $82,200 Annual cash outflows $31,400 $26.700 Cost to rebuild (end of year 4) $50,100 $0 Salvage value $0 $8.200 Estimated useful life 7 years 7 years

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 10E: Roberts Company is considering an investment in equipment that is capable of producing more...

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