Goltra Clinic is considering investing in new heart-monitoring equipment. It has

Question

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 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 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 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 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 6%. 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.)

Explanation / Answer

According to the above calculation Glotra clinic should accept Option B Because of Higher NPV,PI, and IRR.

Year Option A Option B Inflow Outflow Net Cashflow NPV Inflow Outflow Net Cashflow NPV 0 180000 -180000 -180000.00 262000 -262000 -262000.00 1 71100 29600 41500 39150.94 82300 25800 56500 53301.89 2 71100 29600 41500 36934.85 82300 25800 56500 50284.80 3 71100 29600 41500 34844.20 82300 25800 56500 47438.49 4 71100 78100 -7000 -5544.66 82300 25800 56500 44753.29 5 71100 29600 41500 31011.21 82300 25800 56500 42220.09 6 71100 29600 41500 29255.86 82300 25800 56500 39830.27 7 71100 29600 41500 27599.87 90400 25800 64600 42962.69 NPV 13252 58791 IRR 8% 12% Profitability Index 1.07 1.22

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.