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P12-3A Goltra Clinic is considering investing in new heart-monitoring equipment. It has two… 1 answer below » P12-3A 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 ex- penditure 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%. View complete question » Option A P12-3A 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 ex- penditure 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 Instructions (a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of re- turn for each option. ( Hint: To solve for internal rate of return, experiment with alter- native discount rates to arrive at a net present value of zero.) (b) Which option should be accepted? View less » Nov 30 2015 04:49 PM
