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 XSystem Y

0 ($500) ($2500)

1($1,500) ($300)

2($1,250) ($300)

3 ($300) ($300)

a. Assume initially that the systems both have average risk. Which one should be chosen?Note: format is X or Y

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?Note: format is X or Y

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