(a) Interglobal Paper Company has asked for your help in comparing its present computer system with a new one its board of directors would like to see implemented. Proposed system and present system costs are as follows:
Year Proposed System Costs Present System Costs
Year 1
Equipment Lease $20,000 $11,500
Salaries 30,000 50,000
Overhead 4,000 3,000
Development 30,000 —
Year 2
Equipment Lease $20,000 $10,500
Salaries 33,000 55,000
Overhead 4,400 3,300
Development 12,000 —
Year 3
Equipment Lease $20,000 $10,500
Salaries 36,000 60,000
Overhead 4,900 3,600
Development — —
Year 4
Equipment Lease $20,000 $10,500
Salaries 39,000 66,000
Overhead 5,500 4,000
Development — —
i. Using break-even analysis, determine the year in which Interglobal Paper will break even.
ii. Graph the costs and show the break-even point.
(b) Below are system benefits for Interglobal Paper Company (from Q5):
Year Benefits
1 $55,000
2 75,000
3 80,000
4 85,000
i. Use the costs of Interglobal Paper’s proposed system from Problem 10 to determine the payback
period (use the payback method).
ii. Graph the benefits versus the costs and indicate the payback period.
