You are the general accountant for Parker Systems, Inc., a typing service based

Question

You are the general accountant for Parker Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities.

Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well.

Option #2 would be for the company to invest in an entirely different computer system. The software for this system is impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. The net present value information for these options follows:

                                                          Option #1                  Option #2  

Initial Investment                               $(95,000)                   $(270,000)

Returns           Year 1                          55,000                         90,000

                        Year 2                          30,000                         90,000

                        Year 3                          10,000                         90,000

                        Net present value                  0                                  0

Required:

Prepare a brief statement to management in which you make a recommendation for one system or the other, using the information given. **Show all work to receive full credit if applicable**

Explanation / Answer

solution:

In the above both projects NPV is '0'

So , the company should accept option :1 for better result.To purchase upgrades to its present system and to buy a more efficent printer.

In the first place , the changes will be easier to implement because the equipment is simillar to that which is already in use.

Secondly , the company will have less money invested in the project,which decreases the risk of loss should the project fail.Option:2 appears to be too risky also.

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