Answer:
a. VENDOR A
Year Cashflow [email protected]% PV Cummulative PV
$ $ $
0 (380,000) 1 (380,000) (380,000)
1 125,000 0.9091 113,638 (266,362)
2 125,000 0.8264 103,300 (163,062)
3 125,000 0.7513 93,913 (69,149)
4 125,000 0.6830 85,375 16,226
Discounted payback period
= 3 years + $69,149/$85,375
= 3.81 years
Vendor B
Year Cashflow [email protected]% PV Cummulative PV
$ $ $
0 (280,000) 1 (280,000) (280,000)
1 95,000 0.9091 86,365 (193,635)
2 95,000 0.8264 78,508 (115,127)
3 95,000 0.7513 71,374 (43,753)
4 95,000 0.6830 64,885 21,132
Discounted payback period
= 3 years + $43,753/$64,885
= 3.67 years
The ERP should be purchased from vendor 2 because it has a shorter payback period.
Explanation:
In this question, we need to discount the cashflows for each project at 10% for 4 years. Then, we will calculate the cummulative present value by deducting the initial outlay from the cash inflows for each year until the initial outlay is fully recovered.
