You are the general accountant for Word Systems, Inc., a typing service based in Los Angeles, California. The company has decided to upgrade its equipment. It currently has a widely used version of a word processing program. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Two options have emerged. Option #1 is for the company to keep its existing computer system, and upgrade its word processing program. The memory of each individual work station would be enhanced, and a larger, more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The software for this system is extremely impressive, and it comes with individual laser printers. However, the company is not well known, and the software does not connect well with well-known software. Payback and net present value information for these options follows:
Initial Investment ($95,000) ($270,000) Returns: Year 1 55,000 90,000 Year 2 30,000 90,000 Year 3 10,000 90,000 Payback 3 years 3 years Net present value -0- -0-
Required: Prepare a report for management in which you make a recommendation for one system or the other, using the information given. Explain your recommendation fully.