In: Accounting
Analysis:-
System 1:
Initial cost = $300,000
Annual benefit = $170,000
Annual cost = $45,000
Net annual benefit = $125,000
Total Net benefit from the project = ($125,000 * 5) -
$300,000
= $625,000 - $300,000
= $325,000
Profit % = $325,000 / 300,000 = 108.33%
System 2:
Initial cost = $140,000
Annual benefit = $135,000
Annual cost = $55,000
Net annual benefit = $80,000
Total Net benefit from the project = ($80,000 * 5 ) -
$140,000
= $400,000 - $140,000
= $260,000
Profit % = $260,000 / 140,000 = 185.71%
Conclusion:
Based on the above calculations, if you make the decision by
considering the net benefit from the project then System 1 should
be taken because its net benefit is $325,000 which is higher than
the System 2 with benefit of $260,000. But if we take the profit %
as basis for making the decision then System 2 should be chosen
because its benefit % from the project is 185.71% which is higher
than System 1.