PROBLEM 1

Parallon Business Solutions, a division of HCA that provides revenue cycle functions, is evaluating two differentcomputer systems for handling provider claims. There are no incremental revenues attached to the projects,so the decision will be made on the basis of the present value of costs. Parallon's corporate cost of capital is 10 percent.Here are the net cash flow estimates in thousands of dollars:

Year System X SystemY

0 -$500 -$1,000

1 -$500 -$300

2 -$500 -$300

3 -$500 -$300

a. Assume initially that the systems both have average risk. Which one should be chosen?

b. Assume that System X is judged to have high risk. Parallon accounts for differential risk by adjusting itscorporate cost of capital up or down by 2 percentage points. Which system should be chosen?

PROBLEM 2

Xenex Inc., a supplier of hospital room disinfection systems, has a cost of capital of 12 percent to evaluate average-risk projects, and it adds or subtracts 2 percentage points to evaluate projectsof more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and will last four years. Project A, a riskier-than-average project, willproduce annual end-of-year cash flows of $71,104. Project B, of less than average risk, willproduce cash flows of $146,411 at the end of Years 3 and 4 only. Which project should Xenex accept?