Investco, a West Coast research company, must decide on the level of computer technology it will buy for its analysis department. Package A, a midlevel technology, would cost $2.5 million for firmwide installation, while package B, a higherlevel technology, would cost $3.5 million.

Equipped with A-level technology, the firm could generate a cash flow of $1.5 million for two years before the technology would require replacement;

with level-B technology, the firm could generate a cash flow of $1.7 million for three years, after which the technology would require replacement.

Investco is interested in a six-year planning horizon. Assume the following about discount rates:

a. What is the nearest terminal date that is concurrent for both packages? What are the associated cash flows for each package or sequence of packages?

b. What is the optimal decision, given Investco’s planning horizon?

c. At approximately what alternative package B price would Investco be indifferent between the two packages?AppendixLO1

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