Platteville Eye Clinic is considering investing in new optical scanning equipmen
ID: 2467569 • Letter: P
Question
Platteville Eye Clinic is considering investing in new optical scanning equipment.
It has two plans: Plan A would have an initial lower cost but would require a significant expenditure for rebuilding after 3 years. Plan B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the plan 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%.
Plan A
Plan B
Initial Cost
95,000
160,000
Annual cash inflows
56,000
60,000
Annual cash outflows
26,000
23,000
Cost to rebuild (end of year 3)
45,000
0
Salvage Value
0
16,000
Estimated useful life
6 years
6 years
For each plan, compute the
1. net present value
2. profitability index
3. internal rate of return
4. Cash Payback Period
5. Average Rate of Return
Plan A
Plan B
Initial Cost
95,000
160,000
Annual cash inflows
56,000
60,000
Annual cash outflows
26,000
23,000
Cost to rebuild (end of year 3)
45,000
0
Salvage Value
0
16,000
Estimated useful life
6 years
6 years
Explanation / Answer
Ask other parts separately by mentioning answer of the part and providing above solutions
a) Net present Value Particulars Plan A Plan B Annual Cash Inflows 56000 60000 Pv @ 11% for 6 Years 4.23 4.23 Net present Value of Cash Inflows (A) 236910 253832 Annual Cash out Flows 26000 23000 Pv @ 11% for 6 Years 4.23 4.23 Net present Value of Cash Outflows 109994 97302 Initial Cost 95000 160000 Total Cash Outflows (B) 204994 257302 Net present Value ( A - B) 31916 -3470 b) Profitability Index Particulars Plan A Plan B Net present Value of Cash Inflows 236910 253832 Net present Value of Cash Outflows 109994 97302 Net present value of Future Cash Flows (A) 126916 156530 Initial Cost (B) 95000 160000 Profitability Index (A / B) 1.34 0.98