Which system should be chosen

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Question - The Mayo Clinic is evaluating two different housekeeping contracts. Mayo's corporate cost of capital is 10 percent. Here are the net cash flow estimates in thousands of dollars:

Year

System X

System Y

0

-$500

-$2,500

1

-$1500

-$300

2

-$1250

-$300

3

-$300

-$300

Required -

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. Which system should be chosen?

Reference no: EM132868703

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