Question

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 7%. Option A Option B Initial cost $155,000 $262,000 Annual cash inflows $70,700 $80,400 Annual cash outflows $32,000 $25,700 Cost to rebuild (end of year 4) $48,300 $0 Salvage value $0 $8,100 Estimated useful life 7 years 7 years Click here to view the factor table. (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 0 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 $ % Calculate the net present value, incorporating the additional benefits suggested by Rick. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value

Answer 1

Calculation of NPV, IRR & Profitability INDEX
Option A
IRR is the discount rate on which NPV is zero. To calculate this, we have to took two Random Discount Rate:
Period	Initial Cost	Cash Inflow	Cash Outflows	Net Cash flows	P.V.F @ 7%	N.P.V @ 7%	P.V.F @ 11%	N.P.V @ 11%
0	-155000			-155000	1.00000	-1,55,000	1.00000	-1,55,000
1		70,700	-32,000	38700	0.93458	36,168	0.90090	34,865
2		70,700	-32,000	38700	0.87344	33,802	0.81162	31,410
3		70,700	-32,000	38700	0.81630	31,591	0.73119	28,297
4		70,700	-80,300	-9600	0.76290	-7,324	0.65873	-6,324
5		70,700	-32,000	38700	0.71299	27,593	0.59345	22,967
6		70,700	-32,000	38700	0.66634	25,787	0.53464	20,691
7		70,700	-32,000	38700	0.62275	24,100	0.48166	18,640
					NPV	16,718		-4,455
		Salvage Value	NIL
IRR= Lower Discount Rate + [ Lower Rate NPV / ( Lower Rate NPV - Higher Rate NPV )]*(Higher Discount Rate-Lower Discount Rate)
So By putting figure into this formula IRR is		10%
Profitability Index	PV of future Cash flows	(16718+155000)	1.11
		Initial cost		155000
Option B
Period	Initial Cost	Cash Inflow	Cash Outflows	Salvage Value	Net Cash flows	P.V.F @ 7%	N.P.V @ 7%	P.V.F @ 11%	N.P.V @ 11%
0	-262000				-262000	1.00000	-2,62,000	1.00000	-2,62,000
1		80,400	-25,700		54700	0.93458	51,122	0.90090	49,279
2		80,400	-25,700		54700	0.87344	47,777	0.81162	44,396
3		80,400	-25,700		54700	0.81630	44,652	0.73119	39,996
4		80,400	-25,700		54700	0.76290	41,731	0.65873	36,033
5		80,400	-25,700		54700	0.71299	39,001	0.59345	32,462
6		80,400	-25,700		54700	0.66634	36,449	0.53464	29,245
7		80,400	-25,700		54700	0.62275	34,064	0.48166	ekkarill92 Next > < Previous Related Solutions Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would... 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.... Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would... Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. 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Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would... 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.... Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would... 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. 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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.... Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would... 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.... Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would... 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.... Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would... Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. 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