Hillsdale Is Considering Two Options for Comparable Computer Software

question 38

Essay

Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. Interest is at 8%. Ignore income taxes.
Required: Determine which option should be chosen based on present value considerations.

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Definitions:

Profitability Ratios

Ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners’ equity, and sales.

Return On Equity

Net income divided by owners’ equity; also called return on investment (ROI).