Solution for QID #114863: The Hospital for Healthy Living (HHL) financial statements a | StudyHelpMe

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?