Question: How do I calculate the net present value and the internal rate of return? I thought I did the calculations correctly. 6% Initial cost $170,000
How do I calculate the net present value and the internal rate of return? I thought I did the calculations correctly.


| 6% | |||||||
| Initial cost | $170,000 | $274,000 | |||||
| Annual cash inflows | $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 | |||||
| year | Option A | Option B | |||||
| 0 | ($170,000) | ($274,000) | |||||
| 1 | $40,800 | $55,500 | |||||
| 2 | 40,800 | 55,500 | |||||
| 3 | 40,800 | 55,500 | |||||
| 4 | -9,300 | 55,500 | |||||
| 5 | 40,800 | 55,500 | |||||
| 6 | 40,800 | 55,500 | |||||
| 7 | 40,800 | 63,700 | |||||
| IRR | 8.97% | 10.04% | |||||
| PV | $227,761.16 | $315,275.64 | |||||
| ($39,683.89) | |||||||
| $188,077.27 | |||||||
| Total PV | $188,077.27 | $315,275.64 | |||||
| PVI | $18,077.27 | $122,700 | |||||
| 1.11 | 1.45 |
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\%. 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.)
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