Allied Managed Care Company is evaluating two different computer systems for handling providerclaims.

There are no incremental revenues attached to the projects, so the decision will be made onthe basis of the present value of costs.

Allied's corporate cost of capital is 10 percent. Here are thenet cash flow estimates in thousands of dollars:

Year System X System Y

0- -$500 -$1,000

1- -$500 -$300

2- -$500 -$300

3- -$500 -$300

a. Assume initially that the systems both have average risk. I need to know which system should be chosen. Please show work.

b. Assume that System X is judged to have high risk. Allied accounts for differential risk by adjustingits corporate cost of capital up or down by 2 percentage points. I need to know which system should be chosen. Please show work.