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%.

		Option A		Option B
Initial cost		$177,000		$268,000
Annual cash inflows		$72,000		$81,700
Annual cash outflows		$28,500		$25,600
Cost to rebuild (end of year 4)		$51,000		$0
Salvage value		$0		$7,400
Estimated useful life		7 years		7 years

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(a)

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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.)

		Net Present Value		Profitability Index		Internal Rate of Return
Option A		$				%
Option B		$				%

Answer rating: 100% (QA)

1 NPV 2 PI Option Option A B Discounted Discounted Rate Discounted Discounted Year Net Year Net Cash ... View the full answer