Question 8 (a) Question 8 Goltra Clinic is considering investing in new heart-mo

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Question 8

(a)

Question 8

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 8%.
Option A Option B Initial cost $160,000 $227,000 Annual cash inflows $70,000 $80,000 Annual cash outflows $30,000 $26,000 Cost to rebuild (end of year 4) $50,000 $0 Salvage value $0 $8,000 Estimated useful life 7 years 7 years

Click here to view the factor table.

(For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Explanation / Answer

Refering present value table for 8% , we summarise data as

Net present Value is calculated as

Present value factor at end of Year 1 0.92593 Present value factor at end of Year 2 0.85734 Present value factor at end of Year 3 0.79383 Present value factor at end of Year 4 0.73503 Present value factor at end of Year 5 0.68058 Present value factor at end of Year 6 0.63017 Present value factor at end of Year 7 0.58349 Annuity Factor 5.20637

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