Exhibit 1 contains information related to estimated costs and savings associated with the purchase of a new information technology system.

Exhibit 2 contains information related to estimated costs and savings associated with the update of the existing information technology system.

Required:

1.Compute the payback period for the two alternatives.Discuss the advantages and disadvantages of using the payback period to evaluate capital investment decisions. Based on the results of the calculated payback period, which investment would you recommend that Mike and Tim pursue?

2.Assuming the company requires an 8% return from capital investments determine the net present value of the two alternatives.Discuss the advantages and disadvantages of using the net present value method to evaluate capital investment decisions.Based on the results of the calculated net present value, which investment would you recommend that Mike and Tim pursue?

3.Perform net present value calculations using the original cash flows but modifying the company's required return from capital investment decisions.First, assume the required rate of return is 6%.Next, assume the required rate of return is 10%.How would these modifications affect the recommendation that you would make to Mike and Tim?

4.Assuming the company has a hurdle rate for capital investments of 8% determine the internal rate of return for the two alternatives.Discuss the advantages and disadvantages of using the internal rate of return method to evaluate capital investment decisions.Based on the results of the calculated internal rate of return, which investment would you recommend that Mike and Tim pursue?

5.During a discussion with Mike, he indicated that he believes the cash flow estimates for the new system are very conservative.He feels that the net cash flows will be 10% larger than the numbers provided in years 2 through 6.How will those changes affect the payback period, NPV, and IRR?

6.Discuss any significant assumptions that are required when using each of the capital investment tools.Are there any concerns that you would want to bring to Mike and Tim's attention related to these assumptions?

7.What is your final recommendation to Mike and Tim?