An engineering company is considering the purchase of one of two computer systems. System 1 is based on small. Decentralized personal computers and has an initial cost of BD100,000. These will be replaced in five (5) years at a cost of BD100,000. 

The salvage value is BD10,000 at the end of years 5 and 10. It is estimated that the benefits for the first five (5) years will be BD30,000 per year, and the second five (5) years, is BD60,000. System 2 is based on a larger, more powerful work stations and has an initial cost of BD500,000. The replacement will occur at the end of year ten (10), where the salvage value is BD5,000. The amount of benefits is estimated to be BD90,000 per year over the ten (10) years period. 

The company uses a 10% interest rate. Which system should the company purchase?

Calculate the following 

a. Payback period 

b. Profitability index 

c. Internal Rate of Return 

Answer rating: 100% (QA)

2olution faybaxperiod 3 Cy Cs year systemso0000 3000050000300... View the full answer