Hillsdale is considering two options for comparable computer software. Option A

Question

Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 today plus annual license renewals of $1,000 for three years. The annual renewals include technical support. Option B will cost $20,000 today with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. In both options, assume the software is purchased and paid for at the beginning of year one, but that the annual renewals and technical support are paid for at the end of each year. Interest is at 8%. Ignore income taxes. Required: Determine which option should be chosen based on present value considerations.

Explanation / Answer

The comparioson of two proposals on Present Value Method:

Software life / payback consderation 3 years. all figs in US $

The present Value of Option A is cheaper .

The Saving in terms of P.V = $27863.35 - 25576.06 = 2287.29.

therefore the option A be choosen even it is costly as on date i.e requires $ 5000 more. today but saving in will be made in annual fee.

Year Particulars Option A Option B Year 1 [ Purcase Consideration in PV] equal Amt 25000.00 20000.00 Year 2 [ pais in 1st Year end .one year gap from the date of purcase ] division by 1.08 925.92 3703.70 2nd Year [ further 1 year gap] 1.1664 856.33 2571.99 3rd year end [ further one year gap] 1.259712 793.83 1587.66 Total Present Value as on date 25576.06 27863.35

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