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[answered] Brooks Clinic is considering investing in new heart-monitor


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 6%.

Option A ? ? Option B

Initial cost $186,000 ? ? $277,000
Annual cash inflows $72,200 ? $82,700
?Annual cash outflows $28,000 ? ? ?$26,800
?Cost to rebuild (end of year 4) $51,000 ? $0
?Salvage value $0 ? $8,600
?Estimated useful life 7 years ?7 years
Option A

 

Year NPV

 

Profitability Index

 

IRR Cash Flows PVF @ 6% PV @ 6%

 

PVF @ 9% PV @ 9%

 

PVF @ 10%

 

0 - 186,000.00

 

1.0000 186,000.00

 

1.0000 - 186,000.00

 

1.0000

 

1

 

44,200.00

 

0.9434

 

41,698.11

 

0.9174...

 


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