Question

Flounders Inc. has decided to acquire a new computer system. After considering several options it has narrowed its search to two systems. Apple System: purchase cost of $264,940 and operating costs of $20,473 in year 1, $23,967 in year 2, and $24,939 in year 3 (paid at the end of each year). Dell System: purchase cost of $236,416 and operating costs of $36,632 in year 1, $36,207 in year 2, and $37,719 in year 3 (paid at the end of each year). Both computer systems have a service life of 3 years. Based on the defender-challenger approach and given that the MARR is 9%, reinvestment rate is 7%, and minimum external rate of return is 6%, compute the incremental Benefit-Cost ratio of choosing the most expensive computer system and then indicate your recommendation as follows: write down as your answer the value of the incremental B-C ratio if your recommendation is the Apple System; write down as your answer “1” (without the commas) if your recommendation is the Dell System.

Answer 1