Biz Training Ltd. is considering buying a new online learning system to enable them to deliver the training key do for their corporate clients. They are looking at three different systems and the cost of each system is as follows:
System A System B System C
$120,000 $100000 $85000
Each system has a range of functionality, but the do differ quit a bit in what they offer. While they would all do the jobs that Biz Training are looking for, they would need the firm to run their systems very differently and so the expected cash flows from each system are very different. The expected net cash flows (income-expenses) for each system are as follows:
Year System A System B System C
1 $65000 $45000 $15000
2 $55000 $35000 $30000
3 $35000 $35000 $30000
4 $15000 $25000 $40000
5 $25000 $15000 $45000
The firm is assuming a discount rate of 10% and this means that they need to apply a discount factor as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
0.909 0.826 0.751 0.683 0.621
Carry out an investment analysis for three systems using
i. Payback period
ii. Average rate of return
iii. Discount cash flow
Hence advice the company which investment to undertake. Justify your advice (20mks)
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