Frontier Financial ("Frontier") has been operating with the same banking platform software since it commenced operations 15 years ago. The software company that originally developed and sold the technology to the Bank has spent the last 5 years developing a new platform that will move the technology to a new online-enhanced solution. It is expected that this move will make the software more user friendly and allow for faster processing. The Chief Operating Officer is keen to adopt the new technology, however, he remains cautious, as Frontier's performance has been declining over the past few years and profitability has become an issue. The executives of Frontier want to ensure that any large expenditure made is in line with their business strategy, meets the minimum 12% internal rate of return established by the Board of Directors, and will create value in the short and long term. Based on the above, Frontier's Information Technology Department has been tasked with evaluating whether this new platform will suit Frontier's needs. When researching all of the issues surrounding the banking platform upgrade, the IT Department determined that the decision wouldn't be as easy as they had originally thought. Initially, the department agreed that the upgrade was inevitable, as the support for the existing technology would be terminated within 3 years. Their thinking was to implement the upgrade sooner rather than later. However, several other issues have arisen that the department hadn't initially considered. The first is one of timing. The IT Department estimates that a project team would be required if the upgrade is pursued. They believe that the team will require 3 internal staff of business analysts supplied from the Branch Operations Division as well as 2 external project developers from the software company. The project team would be expected to travel around to several satellite branches in order to perform the upgrade of the system. The total time to implement will likely span 6 months, consisting of approximately 700 hours by external developers and 300 by internal staff, including four five-day satellite visits at a cost of $100 travel per day for each project team member (20 days of travel in total for each team member). In addition, there will be 100 hours of system testing performed by the internal staff to ensure the upgrade is successful. The intemal hourly staff rates are calculated at $50, with the external rates calculated at $75. The second issue relates to the installation of the platform itself. Based on IT's investigation, the new technology, will need to be hosted on new servers, as the underlying operating system software is incompatible with the existing servers. The 2 existing servers, along with the 2 located at Frontier's disaster recovery site, are only 2 years old and have some trade-in value left. A quote on trading in the servers was obtained from the company where the servers were originally purchased and it was determined that the four have a trade in value of approximately $30,000 in total. The 4 servers required for the new technology will cost $25,000 each and will be depreciated over 36 months according to internal policy. The third issue relates to the seat licenses required. Under the old contract, seat licenses allowed for 5 users per license. The new contract will require separate licenses for each user. These licenses are less expensive at $500 per seat and amount to one time costs, but the number of users has grown exponentially over the last two years. In fact, there are now 75 users from across Frontier that require access to the banking system, including staff members from the help desk. It is anticipated that although staffing levels will remain constant for the next couple of years, the total number of users may increase by 5% per year thereafter based on estimates provided by the Human Resources Division. Along with the seat licenses, the supplier will charge a software maintenance fee of $12,000 (down from the $20,000 currently being paid). This fee is expected to increase by 5% each year, versus the 3% that Frontier is currently experiencing. This issue ties to the final issue that the IT Department recognized as another consideration staff training. Not only would training be required for 2 new help desk staff (at a salary cost of $70,000 each, fully loaded) that will be required for at least the first year post-implementation, along with the 3 existing staff, but training for the remaining 70 employees who will be using the upgraded system will be required as well. It is expected that there will be two full days of Finally, the hardware maintenance costs on the existing platform have been consistently increasing and it is currently costing Frontier $300,000 per year. Although it isn't anticipated that this annual cost will increase over the next couple of years, commencing in 2026 it is expected that the costs of moving to a support for service fee will increase the maintenance by 3% per year. The upgrade to a new platform would see the annual maintenance costs substantially decrease to $68,000 in the first year (paid in 2024) and increase by 5% per year thereafter. This savings is significant considering these maintenance costs also include any maintenance on the new peripheral devices (e.g., PC's) that are required with the new system. Due to all the above factors, the project team decided to explore the option of converting to a different competitor's platform. During their research, it was determined that to convert, there would be a minimum acquisition of technology and capital of $250,000 required, along with one time development costs of $200,000. Compared to the one time and capital outlays of the project to convert to the online platform, this option looked more attractive than anticipated. Further research indicated that there would also be processing costs, as the competition offers a "service bureau" model - they provide the system, servers, backup facilities, etc - exclusively. This model would add an additional $500,000 per year of processing costs that would not otherwise be incurred by Frontier. The processing costs will increase by 3% per year and are exclusive of any administrative costs that would be incurred to ensure an appropriate service level agreement was drawn up, monitored, and audits of the bureau performed on a regular basis. These additional costs would likely amount to approximately $50,000 in the year of implementation, and $20,000 per year thereafter, increasing by 3% per year. If Frontier were to pursue this option, 5 IT positions, at a cost of $70,000 per year, would be eliminated. In either alternative, PST of 7% will be paid on all extemal costs. Also, assume any cost savings will start in Year 1 as it will take time for completion of the project. In either alternative, PST of 7% will be paid on all extemal costs. Also, assume any cost savings will start in Year 1 as it will take time for completion of the project. Required: Prepare a memo that contains the following information: 1. A summary explanation for the capital budgeting committee on the critical elements that must be considered in the evaluation process. 2. A quantitative analysis of the two projects using at least three different methods including a clear conclusion on the results of your evaluation. 3. Other non-financial factors that you believe the capital budgeting committee should know related to the risk factors of each project (these could include market risk, company risk and project risk), the tax consequences of each and any potential ethical considerations. 4. Your final recommendation to the capital budgeting committee on which project you believe would be the best investment based on both the financial and non-financial factors identified. 5. A conclusion of whether you believe Frontier's 12% hurdle rate is appropriate for this project