ROC is considering investing $275,000 in order to gain more business for its plagiarism identifying services. The
Question:
ROC is considering investing $275,000 in order to gain more business for its plagiarism identifying services. The company has come up with two alternatives outlined below:
Alternative 1 – Build a mobile unit. ROC could spend the money on a mobile unit that would travel from campus to campus in order to provide services to professors immediately after due dates and also to build a larger presence on campus. ROC charges $10.00 per paper it reviews. Currently it takes about an average of 15 minutes to review each paper for plagiarism. The only variable cost is for the labor which averages $11.00 per hour. The mobile unit would cost about $250 to maintain each year and ROC plans to spend about $1,000 on gas each year to fuel the mobile unit. ROC will have to include $500 of working capital in the mobile unit to give change back to any professors paying with cash. The mobile unit would operate 6 days a week for an average of 12 hours a day assuming a 52 week year. The unit should have a useful life of 10 years and have a salvage value of $5,000.
Alternative 2 – Purchase new algorithm software. ROC uses algorithm software to review each paper for plagiarism. A new software is on the market that would allow ROC to cut the review time per paper at headquarters down to 13 and 1/3 minutes. Headquarters operates 16 hours a day, six days a week, for about 335 days per year and there is enough additional demand to review twice as many papers. Papers currently take an average of 15 minutes to review. Selling Price and variable costs are the same as Alternative 1. To use the new software ROC will have to update the computer that is currently being used. The cost of the new computer is included in the $275,000. The old computer cost $2,500 and has accumulated depreciation of $1,500 related to it, and ROC believes it can sell it for $400 dollars. The new software and computer will most likely be obsolete with no disposal value in 5 years.
Requirement:
Using a 10% rate of return and a 30% tax rate calculate the NPV for each alternative and recommend which alternative should be taken.
Expert Answer:
Cost of Equipment 2000000 Payment to be made as under Year 0 today 1000000 Year 1 500000 Year 2 5000... View the full answer
