Explain why the system x is judged to have high risk

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Reference no: EM13201598

HEALTHCARE MANAGED CARE COMPANY IS EVALUATING TWO DIFFERENT COMPUTER SYSTEMS FOR HANDLING PROVIDER CLAIMS. There are no incremental revenues attached to the projects, so the decision will be made on the basis of the present value of costs. Helathcare management co. cost of capital is 10%. here are the net cash flow estimates of dollars.

Year System X System Y

0-$500 -$1000

1 -$500 -$300

2 -$500 -$300

3 -$500 -$300

A. Assume initially that the systems both have average risk. Which one should be chosen?

B. Assume that System X is judged to have high risk. Allied accounts for differential risk by adjusting its corporate cost of capital up or down by 2 percentage points. What system should be chosen?

Reference no: EM13201598

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