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.

How do I calculate the net present value and the internal rate

of return? I thought I did the calculations correctly. 6% Initial cost

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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