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. 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. 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. 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.... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions How do you represent 5.1 (5 + 1/10) in binary? I know that it is 0101.... More and more adults are considering commuting to work by bicycle rather than car, but few... Please answer these questions Data Processing and Analysis using python. Thank you In statistics, an outlier... Write a function file that accepts each of the four vectors as inputs. The function file... Kant says that to act morally is to act out of duty. How does this differ... Suppose you are trying to determine the capacity (in gallons) of the gas tank needed on... List the arithmetic operators used in BASIC and state their priorities of execution in a statement.... ADVERTISEMENT About @ 2020 WizEdu