WWW Inc. has decided to acquire a new Wi-Fi. It has three options. IBM: purchase

Question

WWW Inc. has decided to acquire a new Wi-Fi. It has three options. IBM: purchase cost of $338676 and operating costs of $20202 in year 1, $24030 in year 2, and $27500 in year 3 (paid at the end of each year). Cisco: purchase cost of $239347 and operating costs of $35087 in year 1, $35114 in year 2, and $36346 in year 3 (paid at the end of each year). Sun: purchase cost of $279070 and operating costs of $21190 in year 1, $20046 in year 2, and $20000 in year 3 (paid at the end of each year). Assume that WWW Inc. has a budget of $322912 for this investment and all web servers have a service life of 3 years. Based on the defender-challenger approach and given that the MARR is 9%, reinvestment rate is 7%, and minimum external rate of return is 5%, compute the incremental Benefit-Cost ratio of choosing the best Wi-Fi system (in economic terms) and then indicate your recommendation as follows: - answer "O" (without the commas) if your recommendation is IBM; - answer "1" (without the commas) if your recommendation is Cisco; - write down as your answer the value of the incremental B-C ratio if your recommendation is the Sun system. Note: round your answer to two decimal places, and do not include spaces, currency signs, plus or minus signs, nor commas.

Explanation / Answer

The answer is "1" as cash outflow would be least in case the wi-fi is purchased frm Cisco based on the below mentioned Cost Benefit Analysis Table:-

Companies YEARS 0 1 2 3 Total IBM 338,676.00 20,202.00 24,030.00 27,500.00            1.00           0.92           0.84           0.77 338,676.00 18,533.94 20,225.57 21,235.05 398,670.56 CISCO 239,347.00 35,087.00 35,114.00 36,346.00            1.00           0.92           0.84           0.77 239,347.00 32,189.91 29,554.75 28,065.78 329,157.44 Sun 279,090.00 21,190.00 20,046.00 20,000.00            1.00           0.92           0.84           0.77 279,090.00 19,440.37 16,872.32 15,443.67 330,846.35

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