The Hospital for Healthy Living (HHL) financial statements are in the Excel file named " CH18_Financials_Templates

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The Hospital for Healthy Living (HHL) financial statements are in the Excel file named " CH18_Financials_Templates." During the fiscal year 2013, HHL decides to outsource its information technology services to another company. By doing this outsourcing, HHL will be able to get rid of certain services and staff that cost the hospital $175,000 annually. There is an upfront cost to undertaking this venture, because the company must setup servers, backup systems, and e-mail accounts for HHL. Then, there are annual contract payments that HHL must make with the IT company. The Board of Directors has agreed to a 4-year contract. Management is entertaining two separate bids from two companies. The first requires a $250,000 payment for the initial conversion and $100,000 per year afterward. The other bid requires a $350,000 payment upfront, but only $75,000 annually. HHL has a 6% cost of capital. Which option should HHL choose?

 

Option 1
	Investment	Year 1	Year 2	Year 3	Year 4
Initial Contract	xxx
Annual Contract Cost		xx	xx	xx	xxx
					xxx
Estimated Savings			xx	xx	xxx
Net Cash Flow	0	0	0	0	0
NPV:	0
Option 2
Purchase Price	xx
Annual Contract Cost		xx	xx	xx	xx
Estimated Savings		xx	xx	xx	xx
Net Cash Flow	0	0	0	0	0
NPV:	0
Which option should be choosen and why?