As a director of the IT Department, you have considered replacing computers in t

Question

As a director of the IT Department, you have considered replacing computers in the student lab. The required rate of return for this project is 14% and you have received 2 offers. One is from Lenovo and the other is from Dell. Lenovo's system requires an initial cost of $80,000 and can be used for 4 years. The subsequent maintenance expences are estimated to be $6,000 for the next 4 years. Dell's system has an initial cost of $120,000 and can be used for 8 years. Its maintenence expences are are $8,000 for the next 8 years. Which offer should you choose?

Explanation / Answer

We need to select whose cost is less now let us see the dell one:

Since the cost of lenovo is less than dell therefore lenovo project should be selected

Lenovo years cash outflows discount factor 14% Net value 0 80000 1 80000 1 6000 0.877 5263.158 2 6000 0.769 4616.805 3 6000 0.675 4049.829 4 6000 0.592 3552.482 Net cash outflow 97482.27 We need to divide by factor therefore lenovo 33456.38

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