Question

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.

Answer 1

Answer:

Option a should be selected

Explanation:

After considering the PV of both options A and B the option that has been selected is A.

For option A:-

A total of the present value of option A= -25000-925.926-857.339-793.832 = -27577.097

Present value = 27577

For option B,:-

Total = -20,000-3703.704-2572.017-1587.664

= -27863.385

The present value of option B = 27863

From the calculations I have attached, it is evident that option A has lower present value compared to option B. Therefore option A should be selected.