# P12-3A Goltra Clinic is considering investing in new heart-monitoring equipment.

18 / 01 / 2019 Research Papers

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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

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