Colorado 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 capitalis 8%.
| Option A Don't use plagiarized sources. Get Your Custom Essay on colorado clinic is considering investing in new heart monitoring equipment it has tw 543363 For $10/Page 0nly | Option B | |
| Initial cost | $135,000 | $203,000 |
| Net annual cash flows | $31,000 | $40,000 |
| Cost to rebuild (end of year 4) | $50,000 | $0 |
| Salvage value | $0 | $10,000 |
| Estimated useful life | 8 years | 8 years |
Instructions
(a) Compute the (1) net present value and (2) 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?
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