Question
UI Inc. has decided to acquire a new IT System. It has three options. ZA: purchase cost of $331,126 and operating costs of $25,102 in
UI Inc. has decided to acquire a new IT System. It has three options.
ZA: purchase cost of $331,126 and operating costs of $25,102 in year 1, $29,092 in year 2, and $29,030 in year 3 (paid at the end of each year).
ZE: purchase cost of $208,905 and operating costs of $39,187 in year 1, $37,400 in year 2, and $38,553 in year 3 (paid at the end of each year).
ZU: purchase cost of $256,344 and operating costs of $22,525 in year 1, $22,984 in year 2, and $20,000 in year 3 (paid at the end of each year).
Assume that this firm has a budget of $308,534 for this investment and all IT systems have a service life of 3 years. Based on the defender-challenger approach and given that the MARR is 9%, reinvestment rate is 5%, and minimum external rate of return is 6%, compute the incremental Benefit-Cost ratio of choosing the best IT system (in economic terms) and then indicate your recommendation as follows:
- answer 0 (without the commas) if your recommendation is ZA;
- answer 1 (without the commas) if your recommendation is ZE;
- write down as your answer the value of the incremental B-C ratio if your recommendation is the ZU system.
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