Question

You work for Anadarko Petroleum in their Global EHS Department. You have been tasked in the analysis of the present worth of two new injury-tracking software packages. Package A has an initial cost of $12,400. It has an annual maintenance cost of $1,200, a projected cost benefit of $4100 annually, and the company will buy it back from you in 8 years for $2,200. Package B has an initial cost of $16,800, an annual maintenance cost of $800, a projected cost benefit of $5800 annually, and a salvage value of $1800 in 8 years. Assume 4% interest.

What are your present worths and which option should you choose?
PWA = $10,707; PWB = $21,640
A. Choose Package B because of the higher net present worth. PWA = $21,667; PWB = $15,610
B. Choose Package A because of the higher net present worth. PWA = $12,277; PWB = $11,640
C. Choose Package B because of the lower net present worth. PWA = $28,551 PWB = $33,536
D. Choose Package B because of the higher net present worth.

Answer 1

To choose between two software packages based on their financial impact, it is necessary to calculate their present discounted value to understand their worth in today's terms. The package with the higher net present worth is considered the better investment.

Step-by-step explanation:

The net present worth of two injury-tracking software packages, considering their initial costs, annual maintenance costs, projected cost benefits, salvage values, and an interest rate of 4%. Present worth calculations are crucial in such financial analyses, as they allow businesses to understand the value of future cash flows in today's terms. Present discounted value (PDV) is essential for comparing the present cost of an investment to its future benefits; in this case, the objective is to select the software package that offers a higher net present worth, thus reflecting a better long-term investment.

After performing Present Worth Analysis (PWA) for both packages A and B, we must compare the resulting values to decide which package to choose. If Package A's PWA is $10,707 and Package B's PWA is $21,640, then the optimal choice would be Package B, due to its higher net present worth. On the other hand, if Package A's PWA is $21,667 and Package B's is $15,610, then Package A would be the better choice for its higher net present worth. It's essential to conduct accurate calculations to ensure that the correct software package is selected based on the net present worth provided by each.