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The Mayo Clinic is evaluating two different housekeeping contracts. Mayo's corporate cost of capital is 10 percent. Here are the net cash flow estimates in

The Mayo Clinic is evaluating two different housekeeping contracts. Mayo's corporate cost of capital is 10 percent. Here are the net cash flow estimates in thousands of dollars:

Year System X System Y

0 -$500 -$2,500

1 -$1500 -$300

2 -$1250 -$300

3 -$300 -$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. Allied accounts for differential risk by adjusting its corporate cost of capital up or down by 2 percentage points. Which system should be chosen?

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