Berens River Clinic is considering investing in new heart monitoring equipment. It has two options: Option A

Question:

Berens River 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 four years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of a higher initial quality, the clinic expects it to have a salvage value at the end of its useful life. The clinic made the following cash flow estimates:

The clinic's cost of capital is 8%.
Instructions
(a) Calculate the

(1) Net present value.

(2) Profitability index.

(3) Internal rate of return for each option.

(b) Determine which option the clinic should accept.

Net Present Value
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Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Cost Of Capital
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