compute the 1 net present value and 2 internal rate of return for each option hint t 591871

Oklahoma 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	$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?