Komarek Forests Is Considering a New Software Package That May

question 96

Essay

Komarek Forests is considering a new software package that may improve productivity over the next two years. There is a sixty percent chance that the project will be a success in Year 1, earning $2 million and a forty percent change that the venture will fail during the first year resulting in a $1 million loss due to worse asset management than under the current system. The original system would be reinstalled, resulting in no additional losses during the second year. If the project is a success in the first year, there is an eighty percent chance that it will earn $3 million in the second year.  There is a twenty percent chance that the software will be ineffective in Year 2, despite success in Year 1, in which case there would be a loss of $500,000. Assuming a nine percent required rate of return on these, and a total cost of the software system of $500,000, should Komarek install the new system?

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Definitions:

Warranty Contracts

Agreements that guarantee the repair or replacement of a product within a specified time period if it fails to meet outlined conditions.

Contingent Liability

A potential obligation that may arise in the future, dependent on the occurrence of a specific event.

Financial Statement

Documents that provide an overview of a company's financial condition, including balance sheets, income statements, and cash flow statements.

Expense Recognition Principle

An accounting standard that expenses should be recognized in the period in which they are incurred, regardless of when payment is made.