1. The Hospital for Healthy Living (HHL) financial statements are below. During fiscal year 2013, HHL decides to outsource its information technology services to another company. By outsourcing HHL will be able to get rid of certain services and staff that cost the hospital $175,000 annually. There is an upfront cost to undertaking this venture, because the company must set up servers, backup systems, and e-mail accounts for HHL. Then, there are annual contract payments that HHL must make with the IT company. The board of directors has agreed to a 4-year contract. Management is enteraining bids from two companies. The first requires a $250,000 payment for the initial conversion and $100,000 per year there after. The other bid requires a $350,000 payment up front but only $75,000 annually. HHL has a 6% cost of capital. Which option should HHL choose?

Prior Year Financials	Hospital for Healthy Living (HHL)
	Consolidated Statements of Financial Position (In Thousands)
	2012	2011
Assets
Current assets:
Cash and cash equivalents	$41,443	$40,798
Short-term investments	70,779	48,038
Accounts receivable:
Patient care, less allowance for uncollectibles
(2012 -$31,085; 2011 -$39,048)	56,811	56,548
Inventory	6,132	9,173
Other-net	6,416	4,662
	181,581	159,219
Other current assets	12,439	12,308
Assets limited as to use -current portion	1,276	5,628
Total current assets	195,296	177,155
Assets limited as to use:
Donor restricted	6,587	6,587
Investments held by captive insurance companies	47,099	40,023
Deferred employee compensation plan assets	5,396	3,894
	59,082	50,504
Less assets limited as to use -current portion	-1,276	-5,628
Assets limited as to use -noncurrent	57,806	44,876
Property, buildings and equipment -net	186,481	198,384
Investments in real estate -net	2,518	2,875
Other noncurrent assets	2,470	2,895
Total assets	$444,571	$426,185
Liabilities and net assets
Current liabilities:
Current portion of long-term debt	$2,804	$8,153
Accounts payable and accrued expenses	32,189	30,090
Accrued salaries and related liabilities	31,590	27,909
Due to affiliates, net	1,927	2,988
Professional insurance liabilities -current	6,738	7,767
Other current liabilities	15,534	2,071
Total current liabilities	90,782	78,978
Long-term debt, less current portion	51,250	57,421
Accrued pension liability	29,183	46,268
Deferred employee compensation plan liabilities	5,396	3,894
Professional insurance liabilities -noncurrent	117,686	106,781
Other noncurrent liabilities	55,462	56,022
Total liabilities	349,759	349,364
Net assets:
Unrestricted	86,109	67,936
Temporarily restricted	2,116	2,298
Permanently restricted	6,587	6,587
Total net assets	94,812	76,821
Total liabilities and net assets	$444,571	$426,185
	Consolidated Statements of Operations
Revenue, gains and other support	2012	2011
Net patient service revenue	541,301	531,154
Other revenue	36,656	8,057
Net assets released from restrictions	1,562	1,356
Total revenue, gains and other support	579,519	540,567
Operating expenses
Salaries and wages	226,400	223,599
Employee benefits	59,154	56,660
Supplies and other expenses	266,356	268,202
Interest and amortization of deferred financing fees	3,093	3,180
Depreciation and amortization	23,137	24,477
Total operating expenses	578,140	576,118
Gain(loss) from operations	1,379	(35,551)
Profession liability insurance program premium revision	0	(2,392)
Excess (deficiency) of revenue over expenses	1,379	(37,943)
Other changes in unrestricted net assets
Change in unrealized gains and losses on investments - other than trading securities	4,036	(8,145)
Net assets released from restrictions for purchases of property, buildings and equipment	527	596
Change in pension liability to be recognized in future periods	12,231	(38,728)
Increase(decrease) in unrestricted net assets	18,173	(84,220)
	Consolidated Statement of Cash Flows
	Year Ended December 31
	2012	2011
	(In Thousands)
Operating activities
Change in net assets	17,991	(83,105)
Adjustments to reconcile change in net assets to net cash
provided by operating activities:
Depreciation and amortization	23,137	24,477
Amortization of deferred financing fees	108	129
Net change in unrealized gains and losses on marketable securities	(4,036)	8,145
Loss on other-than-temporary impairment of investments in captive insurance companies		3,875
Changes in operating assets and liabilities:
Patient care accounts receivable, net	(263)	437
Other assets	(1,568)	(1,218)
Accounts payable and accrued expenses	2,099	(467)
Accrued salaries and related liabilities	3,681	1,110
Due to affiliates, net	(1,061)	509
Accrued pension liability	(17,085)	33,271
Professional insurance liabilities	9,876	32,947
Other liabilities	14,405	(5,342)
Net cash provided by operating activities	47,284	14,768
Investing activities
Acquisitions of property, buildings and equipment, net	(8,734)	(14,938)
(Purchases) sales of investments, net	(18,705)	7,789
Net decrease in investments in real estate	357	357
Net (increase) decrease in assets limited as to use	(5,537)	5,871
Net cash used in investing activities	(32,619)	(921)
Financing activities
Principal repayments on long-term debt	(14,020)	(7,097)
Net cash used in financing activities	(14,020)	(7,097)
Net increase in cash and cash equivalents	645	6,750
Cash and cash equivalents at beginning ofyear	40,798	34,048
Cash and cash equivalents at end of year	41,443	40,798
Supplemental disclosure of non cash investing and financing activities
Assets acquired under capitalized lease obligations	2,500	4,905

Ch. 18, TYK #1 Option 1					Name:
	Investment	Year 1	Year 2	Year 3	Year 4
Initial Contract	-250,000
Annual Contract Cost		(100,000)	(100,000)	(100,000)	(100,000)
Estimated Savings		175,000	175,000	175,000	175,000
Net Cash Flow	-250,000	75,000	75,000	75,000	75,000
NPV:
Ch. 18, TYK #1 Option 2
Purchase Price	-350000
Annual Contract Cost		(75,000)	(75,000)	(75,000)	(75,000)
Estimated Savings		175,000	175,000	175,000	175,000
Net Cash Flow	-350000	100000	100000	100000	100000
NPV:
QUESTION: Which option should be Chosen and Why: Option 1 (or) Option 2, and why?