Assume you are meeting with Cisco and Avaya as potential vendors to purchase net

Question

Assume you are meeting with Cisco and Avaya as potential vendors to purchase network equipment.

The initial Cisco network equipment will cost you $10,000 now, $3,000 of maintenance every year for the next 3 years and $1,000 for lease upgrade in year the year later.

The initial Avaya network equipment will cost you $11,000 now, $3,000 of maintenance every year for the next 2 years and $2,500 for lease upgrades for the next two years.

The rate of return is 5% per year. As a manager, how much should you “presently” budget for now for purchasing Cisco vs. Avaya equipment? Which would you choose? (Hint: Time value of money: FV=PV(1+i)n

Explanation / Answer

NPV for cisco= 10000+3000/(1+5%)^1+3000/(1+5%)^2+3000/(1+5%)^3+1000/(1+5%)^4)

=10000+2857.14+2721.08+2591.51+822.70

NPV=$18992.45

NPV for avaya= 11000+3000/(1+5%)^1+3000/(1+5%)^2+2500/(1+5%)^3+2500/(1+5%)^4

=11000+2857.14+2721.08+2159.59+2056.76

NPV for Avaya=$20794.58

Thus Cisco should be choosed because its costing less $ outflow.

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