Problem 1.

Given the information below on Options 1 and 2 for a software project, carry out the following analysis: ROI, NPV.

Option 1: Purchase the FunSoft package: Cost $200,000 for software and $85,000 for hardware in year one; with $50,000 to customize it and a $40,000 annual licensing fee for the life of the contract. There will be an annual savings of $61,000 due to the layoff of a clerk.

Option 2: Purchase the SoftComm package, which will operate on the vendor's hardware: Cost $250,000 for a five-year license, payable half up front and half during the first year of implemen- tation. The maintenance contract, at $75,000 a year, includes all currently identified modifications to the software for the first three years. The clerk's hours will be cut by half, for a saving of $25,000 a year.

In both cases, sales are expected to increase from the current $1 million a year, by 10% per year each year (over each year's previous year's sales) after full implementation. An interest rate of 6% was used. Assume a five-year life for the software.