The Cloud Computing Company (CCC) has a contract with Vigilant Associates to monitor the availability of the software applications it hosts for its customers. The Vigilant contract costs CCC $100,000 per year, paid annually in advance. CCC is considering replacing Vigilant at the end of the current contract year with a software monitoring tool that it could use to perform the monitoring itself with no additional labor costs. The cost of the software is a one-time $200,000 perpetual license fee paid at the start of the engagement, followed by a $40,000 maintenance fee paid annually in advance. The software is expected to have a useful life of five years. The hurdle rate for CCC is 5%.
a. Should the Company replace Vigilant with the software tool? Why or why not?
b. How would your conclusion change if the hurdle rate was 20%?