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P12-3B Platteville Eye Clinic is considering investing in new optical-scanning equip. ment. It has two...

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Accounting

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P12-3B Platteville Eye Clinic is considering investing in new optical-scanning equip. ment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 3 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is o 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 11%. Compute nel present value, profitability index, and internal rate of retum. 2 12 Planning for Capital Investments Option A Option B Initial cost $100,000 $160,000 Annual cash inflows $56,000 $60,000 Annual cash outflows $24,000 $24,000 Cost to rebuild (end of year 3) $53,000 $0 Salvage value $0 $24,000 Estimated useful life 6 years 6 years Instructions (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.) (b) Which option should be accepted? (a) (1) NPVA 53,376) (3) IRR B 12%

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