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Question - The Green 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 8%:
Option A
Option B
Initial Cost
$160,000
$227,000
Annual cash inflows
$71,000
$80,000
Annual cash outflows
$30,000
$31,000
Cost to rebuild (end of year 4)
$50,000
$0
Salvage Value
$8,000
Estimated Useful Life
7 years
Required -
1. Compute the net present value?
2. Compute the IRR?
3. Which option should be accepted?
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