Hi, see attached document (link below excel) see problem P10-3A for specific sol

Question

Hi, see attached document (link below excel) see problem P10-3A for specific solutions. I already tried working on it. http://www.4shared.com/zip/O6lckS0u/ACCT-301_Week_6.html Carolina 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 Hint: Compute net present value, profitability index, and internal rate of return. Instructions (a) 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.) (a) (1) NPV A $6,321 (3) IRR B 15%

Explanation / Answer

The company's cost of capital is 11%. Annual cash inflows: $80,000 Annual cash outflows: $30,000 Salvage value: $12,000 Estimated useful life: 8 years SO: Net flow = 80000 - 30000 = 50000 Step 1: find present value of 8 annual flows of $50,000, using 11% Step 2: find present value of $12,000: discounted for 8 years at 11% Step 3: add 'em up!

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