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 $196,000 $291,000
annual cash inflows $72,500 $82,500
annual cash outflows $28,000 $25,600
cost to rebuild (end of year 4) $49,100 $0
salvage value $0 $8,500
estimated useful life 7 years 7 years

compute the
(1) net present value
(2) profitability index
(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. 10.50. for calculation purposes, use 5 decimal places as displayed in the factor table provided.)