During fiscal year 2013, HHL decides to outsource its information technology services to another company.

During 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 afterwards. 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? Use the information above to fill out this chart showing which option is the best to choose. 

A B C D E F 5 POINTS 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 XX XXX Net Cash Flow 0 0 0 0 0 NPV: 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