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Problem 26-3A (Part Level Submission) Brooks Clinic is considering investing in new heart-monitoring equipment. It...

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Accounting

Problem 26-3A (Part Level Submission) 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 companys cost of capital is 6%. Option A Option B Initial cost $186,000 $277,000 Annual cash inflows $72,200 $82,700 Annual cash outflows $28,000 $26,800 Cost to rebuild (end of year 4) $51,000 $0 Salvage value $0 $8,600 Estimated useful life 7 years 7 years Click here to view PV 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.)

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