Blossom 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 5%. Option A Option B Initial cost $183,000 $281,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $28,000 $25,000 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,000 Estimated useful life 7 years 7 years

Blossom 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 5%. Option A Option B Initial cost $183,000 $281,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $28,000 $25,000 Cost to rebuild (end of year 4) $48,000 $0 Salvage value $0 $7,000 Estimated useful life 7 years 7 years

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...

See similar textbooks

Similar questions

Cullumber 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 5%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Click here to view the factor table. (a) Your answer is partially correct. Option A Option A $170,000 $70,200 $30,700 $49,000 Option B $ $0 7 years $ 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…
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.) Option A Option B tA $ $ Net Present Value 103345 Profitability Index 1.55 Internal Rate of Return do % %
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%. Option A Option B 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 Click here to view PV table. (a) * Your answer is incorrect. 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…
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 5%. Option A Option B Initial cost $193.000 $285,000 Annual cash inflows $72,900 $82.500 Annual cash outflows $28,700 $26,700 Cost to rebuild (end of year 4) $50.700 S0 Salvage value SO $7.700 Estimated useful life 7 years 7 years Click here to view PV table. (a) Compute the (1) net present value, (2) profitability index and (3) Internal rate of return for each option. (HintE To solve for internal rate of return, experiment with alternative discount rates to arrive at a net…
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%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A $155,000 $70,700 $32,000 $48,300 $0 7 years Option B $262,000 $80,400 $25,700 $0 $8,100 7 years
Carla Vista 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 5%. Option A Option B Initial cost $194,000 $291,000 Annual cash inflows $72,600 $82,000 Annual cash outflows $28,100 $25,100 Cost to rebuild (end of year 4) $51,200 $0 Salvage value $0 $9,000 Estimated useful life 7 years 7 years Click here to view the factor table. (a) Your answer is partially correct. 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…
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $193,900 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $30,600. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other rpachines, and thus will reduce downtime. Assume a discount rate of 7%. Click here to view the factor table. Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg-45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to 0 decimal places, eg. 125) Net present value $ How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to 0 decimal places, e.g. 125.)
Carla Vista 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 5%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A $194,000 $72,600 $28,100 $51,200 $0 7 years Option B $291,000 $82,000 $25,100 $0 $9,000 7 years
Assume that Monsanto Corporation is considering the replacement of some ofits older and outdated carpet-manu facturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company's finance department has compiled pertinent data to conduct a marginal cost-benefit analysis for the proposed equipment replacement. The cash outlay for new equipment would be approximately $600,000. The net book value of the old equipment and its potential net selling price add up to $250,000. The total benefits over the life of the new equipment (measured in today's dollars) would be $900,000. The sum of benefits from the remaining life of the old equipment (measured in today's dollars) would be $300,000. To Do Create a spreadsheet to conduct a marginal cost-benefit analysis for Monsanto Corporation, and determine the following: a. The marginal benefits of the proposed new equipment. b. The marg inal costs of the proposed new…
The Umbrella company is planning to purchase a substance known as Serum A. Serum A would cost $45,000 and would have a useful life of 10 years with zero salvage value. The expected annual cash flow of the serum is $9,500. Management wants a 20% return on all investments. Use the provided present value tables for this question. If you use excel or a different table your answer will be marked incorrect by the quiz autograder. Required: 1. Compute the internal rate of return (IRR) for Serum X. Your answer should be in numberical form (DO NOT include the percentage sign) and will be enter as between two percentages o Between % % and 2. Should Umbrella company invest in Serum X based on it's required rate of return of 20%? Enter your answer as Yes or No.
Sarasota Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $450,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $78,750. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Click here to view PV tables. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Sarasota's discount rate is 10%. (Use the above table.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 5,275.) Reduction in downtime would have to have a present value $
Cullumber Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $163,500 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $30,700. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Assume a discount rate of 12%. Click here to view PV table. Calculate the net present value. (If the net present value is negative, use either a negative sign preceding the number eg-45 or parentheses eg (45). For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round present value answer to O decimal places, eg. 125) Net present value $ How much would the reduction in downtime have to be worth in order for the project to be acceptable? (Round answer to O decimal places, e.g. 125) $