Sunset Graphics is considering moving to a cloud-based accounting system because its current system only runs on outdated computers. The cloud-based system is very similar to the current system, so there would be no additional training required. The cloud-based system will cost $1,500 per month for the next 36 months. The company will write off its old equipment and record a corresponding loss of $2,000. It will buy five new computers to access the cloud at a total cost of $2,200.
Its alternative is to purchase a new local accounting system. If it pursues this alternative, the company will also spend $2,200 on five new computers and write off the old hardware and software. The new software will cost $40,000. Sunset Graphics uses a discount rate of 10 percent.
a. Which alternative is the better solution? Why? What factors would influence your decision?
b. Assume the local accounting system is expected to last 5 years but will require a major upgrade costing $15,000 at the end of year 3. Also assume that the cost of the cloud-based system will fall to $1,200 per month for months 37-60. Neither alternative will have any residual value. Compare the two alternatives again.