Concept explainers
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 8%.
Option A | Option B | |
Initial cost | $160,000 | $227,000 |
Annual |
$71,000 | $80,000 |
Annual |
$30,000 | $31,000 |
Cost to rebuild (end of year 4) | $50,000 | $0 |
Salvage value | $0 | $8,000 |
Estimated useful life | 7 years | 7 years |
Instructions
(a) Compute the (1)
(b) Which option should be accepted?
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