Sandhill 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%. Option A Option B Initial cost Annual cash inflows $170,000 $274,000 $72,200 $82,200 Annual cash outflows $31,400 $26.700 Cost to rebuild (end of year 4) $50,100 $0 Salvage value $0 $8.200 Estimated useful life 7 years 7 years
Sandhill 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%. Option A Option B Initial cost Annual cash inflows $170,000 $274,000 $72,200 $82,200 Annual cash outflows $31,400 $26.700 Cost to rebuild (end of year 4) $50,100 $0 Salvage value $0 $8.200 Estimated useful life 7 years 7 years
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 10E: Roberts Company is considering an investment in equipment that is capable of producing more...
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