You are now the Vice President of Information Technology for small, not-for-profit college. The university's current SIS (student information system) is outdated and will not be serviced beyond next year. In short, this means the decision to replace the SIS is mandatory, and while the SIS does not generate revenues, it does reduce expense resulting in some cash savings. Since this is a major commitment of cash, the ROI profitability rules are used in decision-making with the lowest cost being the best option.

The CFO has tasked you with providing the board at least 3 pricing options. The estimated life of the SIS is 15 years after which point the program will need to be replaced. You are to make a recommendation for the most economical option based on NPV and IRR. As part of your presentation, you will need to present these for all three options.

• Option 1 has an initial cost of $1.75 million ($1,750,000) and annually saves the college $250,000 in other expenses.
• Option 2 has an initial cost of $2.5 million and annually saves the college $325,000 in other expenses.
• Option 3 has an initial cost of $2.75 million and annually saves the college $350,000 in other expenses.

To determine the NPV and minimum IRR that is acceptable, the WACC must be computed. The CFO has told you that the colleges long-term financing is 30% debt with an after tax yield of 8%, the remaining long-term funding is fund capital (equity) on which the Board requires a 10% return.