Homework answers / question archive / Software project decision point

Software project decision point

Accounting

Share With

---

Software project decision point.

1. You need to determine an interest rate to use (use 30 year treasury bond plus 4 percentage points) —select an interest rate and explain why you think this number should be used. Use it in your calculations for items 3 & 4 below.
2. Given the information below on options 1 and 2, carry out three forms of analysis: breakeven, ROI, and NPV.
3. Make a recommendation on which way to proceed, based on the TCO for each option.

• 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 saving 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 implementation.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.

Assume a five-year life for the software.