P12-3A Carolina Clinic is considering investing in new heart monitoring equipmen

Question

P12-3A Carolina Clinic is considering investing in new heart monitoring equipment
P12-3A

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
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.) (Round computations and final answer for net present value to 0 decimal places, e.g. 125. Round profitability index to 2 decimal places, e.g. 10.50.)
Net Present Value Profitability Index Internal Rate of Return
Option A $ 6321 12 %
Option B $ 15 %

P12-3A Carolina Clinic is considering investing in new heart monitoring equipment
P12-3A

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
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.) (Round computations and final answer for net present value to 0 decimal places, e.g. 125. Round profitability index to 2 decimal places, e.g. 10.50.)
Net Present Value Profitability Index Internal Rate of Return
Option A $ 6321 12 %
Option B $ 15 %

Explanation / Answer

I figured it out. and will not post anything relating to this problem so that others can figure it out on their own like I had to.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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