Acorn Corporation designs and installs fire-suppression systems in commercial buildings. Over 90 percent of Acorn's business is in new construction, with the remainder in upgrade installations in remodeled buildings. For planning and control purposes, Acorn's controller (Jane Reid) is considering purchasing cost and financial accounting software from Constructor Solutions. Costs for the software modules are shown below:
Module 1: Bidding and estimation $3750.00
Module 2: Job cost accounting 3,250.00
Module 3: General ledger package 2,875.00
Module 4: Accounts Receivable 1,840.00
Module 5: Accounts Payable 1,660.00
Module 6: Financial statement preparation 1,440.00
Or, the entire set of six modules at a 10% discount based on individual module purchases $13,333.50
Required:
1. Jane uses value-chain analysis in evaluation of capital investments. She asks you which method, internal rate of return (IRR) or net present value (NPV), would be best in selecting individual software modules, and your reason(s) for the choice of method.
2. Jane says, "If we buy the entire set of six modules, we will get the equivalent of Module 6 free." Why might this savings of almost $1,500 be illusory?
3. The present value of the cost savings generated by the set of six modules, based on a five-year life and discount rate of 18 percent, is estimated as $13,844.50. Should the set be purchased? Explain. How would your decision be affected if Acorn's minimum rate of return were 24 percent? (No calculations are necessary to answer this question.)