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Business, 10.05.2020 01:57 Mathcat444

Goltra 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 11%.
Option A Option B
Initial cost $160,000 $227,000
Annual cash inflows $75,000 $80,000
Annual cash outflows $35,000 $30,000
Cost to rebuild (end of year 4) $60,000 $ 0
Salvage value $ 0 $12,000
Estimated useful life 8 years 8 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 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 computations and final answer for present value to 0 decimal places, e. g. 125. Round profitability index to 2 decimal places, e. g. 10.50. Round answer for IRR to 0 decimal place, e. g. 12. Round computations for Discount Factor to 5 decimal places.)

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