A residence administering agency plans to purchase a new IT system in order to better control receiving rents and to adjust rents to market conditions sooner. Presently the agency has a loss in revenue due to this deficiency. A better IT system could overcome this deficiency.

The goal of the following investment appraisal is to decide if the purchase of the IT system is profitable. The system can be purchased as well as leased.

The following financial details are known:

– Current annual loss: € 50,000 – Costs for the software: € 152,000, payable at delivery, hence at the beginning of the economic life – Maintenance: € 1,300 per month – Interest rate: 6 %

– Economic life: 6 years

a) Calculate the payback of the computer systems.

b) The management is using a four-year maximum payback criterion for investments. What advice would you give?

c) What is the investment project’s accounting rate of return? What would your advice be if the minimum acceptable level of the accounting rate of return were 6 %?