Group Genesis is considering upgrading its computer servers. Two mutually exclusive plans are proposed by the IT consulting firm and their respective estimated net cash flows are listed below. Assume that the relevant discount rate is 8% per annum.

(a) Compute the payback period for Plan I and Plan II.

(b) If Group Genesis uses a payback criterion of 2.8 years or less, which plan would it choose based on the results in part (a)?

(c) Just by studying the cash flows pattern of Plans I and II (i.e., WITHOUT calculation), explain which plan should have higher NPV value.

(d) Compute the NPV of Plan I and Plan II. Which plan should the company accept (if any)?

(e) Based on the results in parts (a) and (d), which plan should Group Genesis choose? Explain.

Transcribed Image Text:

Year Plan I 0 -$150,000 Plan II -$150,000 1 $50,000 $64,000 23 $50,000 $56,000 $50,000 $40,000 4 $50,000 $40,000 Year Plan I 0 -$150,000 Plan II -$150,000 1 $50,000 $64,000 23 $50,000 $56,000 $50,000 $40,000 4 $50,000 $40,000

Answer rating: 100% (QA)

SOLUTION a Payback Period Plan I Year 0 150000 Year 1 50000 Year 2 50000 Payback Period 3 ye... View the full answer