The Mayo Clinic in Rochester is evaluating two different computer systems for handling provider claims. There...

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The Mayo Clinic in Rochester is evaluating two differentcomputer systems for handling provider claims. There are noincremental revenues attached to the projects, so the decision willbe made on the basis of the present value of costs. Mayo'scorporate cost of capital is 10 percent. Here are the net cash flowestimates in thousands of dollars:
a. Assume initially that the systems both have average risk. Whichone should be chosen?
b.Assume that System X is judged to have high risk. Mayo accounts fordifferential risk by adjusting its
corporate cost of capital up or down by 2percentage points. Which system should be chosen?
Year System X System Y
0 -$500 -$2,500
1 -$1,500 -$300
2 -$1,250 -$300
3 -$300 -$300
Please show work in Excel

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4.0 Ratings (665 Votes)

a System X Discount rate 01 Year 0 1 2 3 Cash flow stream 500 1500 1250 300 Discounting factor 1 11 121 1331 Discounted cash flows project 500 136364 103306 225394 NPV Sum of discounted cash flows NPV System X 312209 Where See Answer

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Transcribed Image Text

The Mayo Clinic in Rochester is evaluating two differentcomputer systems for handling provider claims. There are noincremental revenues attached to the projects, so the decision willbe made on the basis of the present value of costs. Mayo'scorporate cost of capital is 10 percent. Here are the net cash flowestimates in thousands of dollars:a. Assume initially that the systems both have average risk. Whichone should be chosen?b.Assume that System X is judged to have high risk. Mayo accounts fordifferential risk by adjusting its corporate cost of capital up or down by 2percentage points. Which system should be chosen?Year System X System Y0 -$500 -$2,5001 -$1,500 -$3002 -$1,250 -$3003 -$300 -$300Please show work in Excel

a. Assume initially that the systems both have average risk. Whichone should be chosen?
b.Assume that System X is judged to have high risk. Mayo accounts fordifferential risk by adjusting its
corporate cost of capital up or down by 2percentage points. Which system should be chosen?