Hillsdale Is Considering Two Options for Comparable Computer Software

question 46

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.The discount rate is 8%.Ignore income taxes.Determine which option should be chosen based on present value considerations.

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Definitions:

Capital Budgeting

The process of making capital expenditure decisions in business.

Internal Reports

Financial or operational reports generated for internal use by the management and not for external stakeholders.

Improperly Sequenced

Arranged in an incorrect order that does not follow logical or established progression.

Capital Budgeting

The process by which a business evaluates and plans for significant investments in projects, properties, or equipment.