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’s cost of capital is 9%.
Option A Option B Initial cost $155,000 $229,000 Annual cash inflows $70,300 $80,300 Annual cash outflows $31,700 $26,100 Cost to rebuild (end of year 4) $48,700 $0 Salvage value $0 $8,200 Estimated useful life 7 years 7 years

Explanation / Answer

OPTION Bshould be accept

e

Option A PV factor -155000 1 -155000 Net Annual Cash flow 1-7 years 38600 5.03295 194272 Rebuild Cost 4th year -48700 0.70843 -34500.3 NPV 4772

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