You are general accountant for Word system. Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities.

Two options have emerged. Option 1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each individual work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well.

Option 2 would be for the company invest in an entirely different computer system. The software for this system is extremely impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The cash flow information for these options follows :

	Option 1
0	(115,000)
1	12,500
2	23,500
3	27,000
4	38,000
5	45,000
6	55,000
	86,000

	Option 2
0	(85,000)
1	12,500
2	15,500
3	21,500
4	24,500
5	42,000
6	55,000
	86,000

Required:

Determine which of the options is more preferable by using payback period and discounted payback period if the interest rate is 10%.

Note: with explanation