Problem 26-3A (Part Level Submission) Brooks Clinic is considering investing in

Question

Problem 26-3A (Part Level Submission) Brooks 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 5%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Option A Option B $182,000 $283,000 $72,800 $81,700 $30,600 $26,500 so 50 $8,600 ears $51,300 7 years 7 (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.) (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to o decimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net Present Value Profitability Index Internal Rate of Return Option A Option B

Explanation / Answer

Net amount raised $ 141,337,000 6620000*21.35 Direct costs $    13,159,000 912000+6620000*(23.2-21.35) Indirect costs $          187,000 Total costs $    13,346,000 13159000+187000 Flotation cost percentage 8.69% 13346000/(6620000*23.2)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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