Question

The company XYZ needs to acquire a new operating system. They received two bids for two different providers. System A has a 6-year life, but it is expensive, while system B is less expensive but has to be replaced after 3 years. The cost of purchasing both system and the cost of operating them annually over their expected lives are as following:

Year              System A              System B

0                    (95,000)               (55,000)

1                    (4,000)                 (5,000)

2                    (4,000)                 (4,000)

3                    (4,000)                 (3000)

4                    (2,000)  

5                   (2,000)

6                    (2,000)

Conduct an analysis to evaluate this investment and recommend the system that the company should acquire. The required rate of return is 12 percent.

Answer 1

Let's analysis these two systems by its Cost of operating

Operating costs or Cost of Operating are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility.