Carla Vista Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lowercost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but itsmaintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at theend of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 5%.Option AOption BInitial cost$194,000$291,000Annual cash inflows$72,600$82,000Annual cash outflows$28,100$25,100Cost to rebuild (end of year 4)$51,200$0Salvage value$0$9,000Estimated useful life7 years7 yearsClick 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 internalrate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value isnegative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to Odecimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places asdisplayed in the factor table provided.)Net Present ValueOption A$21371Option B$44641Profitability IndexInternal Rate of Return1.11.92%1.159.52%

Capital budgeting is a tool to assess and select long-term investment possibilities. It entails…

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 O 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.) Profitability Index Internal Rate of Return 21371 1.1 1.92 % Net Present Value Option A $ Option B $ 44641 1.15 9.52 %

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 O 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.) Profitability Index Internal Rate of Return 21371 1.1 1.92 % Net Present Value Option A $ Option B $ 44641 1.15 9.52 %

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 10E: Roberts Company is considering an investment in equipment that is capable of producing more...

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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
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