In this section, you need to evaluate two investment alternatives #1 and # 2

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In this section, you need to evaluate two investment alternatives #1 and # 2.

The X department (in your company) suggests purchasing new computer software to

reduce costs. There are two competitive software in the market, alternative #1, $194,000

and # 2, $336,000.

Based on the Canadian Tax Act, software should be depreciated with a CCA of 30%. After five years, the salvage value of either investment is 0. IT would hire a professional adviser under either investment alternative to help in the decision making whether to invest in the alternative for a fee of $25,000 and this fees will be expensed when it is incurred. In Addition, IT would charge X department the use of computer time at the rate of $394, for an estimated of 182 hours of computer time per year to run the new software under either alternative, #1 or #2. You were informed that the discount rate is 15%. The corporate tax of your company is 35%.

Below is the saving (before tax) generated by each investment alternative

Year #1 #2

1 $86,000 $118,000

2 $86,000 $130,000

3 $67,000 $106,000

4 $56,000 $98,000

5 $39,000 $59,000

This section requires to show detail calculations. Which investment alternative do you

select? Why? If calculations are not presented, the grade will be zero.

This question pertains to How to Make Capital Investment Decisions