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%. Option A Option B Initial cost $170,000 $293,000 Annual cash inflows $70.200 $83,000 Annual cash outflows $30,700 $25,600 Cost to rebuild (end of year 4) $49,000 $0 Salvage value $0 $7,800 Estimated useful life 7 years 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 ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is egative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to O ecimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as isplayed in the factor table provided.) Net Present Value Option A $ Option B $ Profitability Index Internal Rate of Return % %
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%. Option A Option B Initial cost $170,000 $293,000 Annual cash inflows $70.200 $83,000 Annual cash outflows $30,700 $25,600 Cost to rebuild (end of year 4) $49,000 $0 Salvage value $0 $7,800 Estimated useful life 7 years 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 ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is egative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to O ecimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as isplayed in the factor table provided.) Net Present Value Option A $ Option B $ Profitability Index Internal Rate of Return % %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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%.
Option A
Option B
Initial cost
$170,000
$293,000
Annual cash inflows
$70.200
$83,000
Annual cash outflows
$30,700
$25,600
Cost to rebuild (end of year 4)
$49,000
$0
Salvage value
$0
$7,800
Estimated useful life
7 years
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
ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is
egative, use either a negative sign preceding the number eg-45 or parentheses eg (45). Round answers for present value and IRR to O
ecimal places, eg. 125 and round profitability index to 2 decimal places, eg. 12.50. For calculation purposes, use 5 decimal places as
isplayed in the factor table provided.)
Net Present Value
Option A
$
Option B
$
Profitability Index
Internal Rate of Return
%
%
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