Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for in ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is egative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to ecimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places isplayed in the factor table provided.) Option A Option B $ $ Net Present Value Profitability Index Internal Rate of Return % %
Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (Hint: To solve for in ate of return, experiment with alternative discount rates to arrive at a net present value of zero.) (If the net present value is egative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answers for present value and IRR to ecimal places, e.g. 125 and round profitability index to 2 decimal places, e.g. 12.50. For calculation purposes, use 5 decimal places isplayed in the factor table provided.) Option A Option B $ $ Net Present Value Profitability Index Internal Rate of Return % %
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 28P: Friedman Company is considering installing a new IT system. The cost of the new system is estimated...
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![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.)
Option A
Option B
tA
$
tA
Net Present Value
Profitability Index
Internal Rate of Return
%
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1a4eeb32-1652-4622-80f9-de25f0a55277%2Fa8665568-43e8-475e-a175-9db9e77e7bd2%2Fzje4vo2_processed.png&w=3840&q=75)
Transcribed Image Text: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.)
Option A
Option B
tA
$
tA
Net Present Value
Profitability Index
Internal Rate of Return
%
%
![Crane 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 6%.
Initial cost
Annual cash inflows
Annual cash outflows
Cost to rebuild (end of year 4)
Salvage value
Estimated useful life
Option A
$181,000
$73,000
$30,200
$48,000
$0
7 years
Option B
$283,000
$82,400
$25,100
$0
$8,300
7 years](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1a4eeb32-1652-4622-80f9-de25f0a55277%2Fa8665568-43e8-475e-a175-9db9e77e7bd2%2F1cgm2f_processed.png&w=3840&q=75)
Transcribed Image Text:Crane 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 6%.
Initial cost
Annual cash inflows
Annual cash outflows
Cost to rebuild (end of year 4)
Salvage value
Estimated useful life
Option A
$181,000
$73,000
$30,200
$48,000
$0
7 years
Option B
$283,000
$82,400
$25,100
$0
$8,300
7 years
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