M41. Wildhorse 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 6%Initial costAnnual cash inflowsAnnual cash outflowsCost to rebuild (end of year 4)Salvage valueEstimated useful lifeClick here to view the factor table(a)(a)Option AOption A$167,000$71,700$31.500$50,200Option B507 yearsCompute the (1) net present value. (2) profitabilndex and (3) internal rate of return for each option. (Hint: To solve for internalWilt the not present value isSOption B$271,000$80,500$25,800Compute 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 valueand IRR to O decimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculationpurposes, use 5 decimal places as displayed in the factor table provided.)Net Present Value$0$8,3007 yearsProfitability IndexInternal Rate of Return

Net Present Value or NPV is the difference between the present value of cash inflows and present…

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.)

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.)

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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