Ivanhoe 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%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Click here to view PV table. (a) Option A Option B Option A $177,000 $72,000 $28,500 $51,000 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 O 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.) S $0 7 years Option B $268,000 $81,700 $25,600 $0 $7,400 7 years Net Present Value Profitability Index Internal Rate of Return %
Ivanhoe 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%. Initial cost Annual cash inflows Annual cash outflows Cost to rebuild (end of year 4) Salvage value Estimated useful life Click here to view PV table. (a) Option A Option B Option A $177,000 $72,000 $28,500 $51,000 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 O 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.) S $0 7 years Option B $268,000 $81,700 $25,600 $0 $7,400 7 years Net Present Value Profitability Index Internal Rate of Return %
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Ivanhoe 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%.
Initial cost
Annual cash inflows
Annual cash outflows
Cost to rebuild (end of year 4)
Salvage value
Estimated useful life
Click here to view PV table.
(a)
Option
A
Option A
$177,000
$72,000
$28,500
$51,000
Option
B
$0
7 years
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.)
Profitability Index
Option B
$268,000
$81,700
$25,600
$0
Net Present Value
$7,400
7 years
Internal Rate of Return
%
%
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