A company is trying to decide which of two computer systems to install. System A costs $1 million and will increase operating profits by $500,000 per year. Its useful life is five years. Because of rapid technological change, it will have no salvage value at the end of this time. System B costs $1.5 million and will increase operating profits by $800,000 per year. Its useful life also is five years, and it too will have no salvage value. For tax purposes, the company can depreciate either computer system on a straight-line basis.

a. Suppose the company's tax rate is 40 percent and its cost of capital for either computer system is 10 percent. Which system should it buy?

b. If no depreciation is allowed, which computer system is the better choice?