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P12-3B Platteville Eye Clinic

Price: $2.50


P12-3B Platteville Eye Clinic is considering investing in new optical-scanning equipment.
It has two options: Option A would have an initial lower cost but would require a
significant expenditure for rebuilding after 3 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 11%.


Instructions
(a) 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.)
(b) Which option should be accepted?

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