UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT Chapter 12 -- Project Risk Analysis

     Allied Managed Care Company is evaluating two   different computer systems for handling provider claims.   There   are no incremental revenues attached to the projects, so the decision will be   made on the basis of   the   present value of costs. Allied's corporate cost of capital is 10 percent.   Here are the net cash flow    estimates   in thousands of dollars:                       Year System X System Y          0 -$500 -$1,000          1 -$500 -$300          2 -$500 -$300          3 -$500 -$300                     a.   Assume initially that the systems both have average risk. Which one should be   chosen?     b.   Assume that System X is judged to have high risk. Allied accounts for   differential risk by adjusting its    corporate cost of capital up or down by 2   percentage points. Which system should be chosen?