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Carolina 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 companys cost of capital is 12%. Option A Option B Initial cost $160,000 $227,000 Annual cash inflows $75,000 $80,000 Annual cash outflows $35,000 $30,000 Cost to rebuild (end of year 4) $60,000 $0 Salvage value $0 $12,000 Estimated useful life 8 years 8 years Instructions (a) Compute the (1) net present value, (2) profitability index, and (3) internal rate of return for each option. (b) Which option should be accepted?

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