Practise 3.4.5 (HL) Depreciation method suitability in IB Business Management HL by connecting concepts to case evidence and decisions.
Easy E Booking (EEB) is a small, well-known, reputable and financially stable online hotel reservation service. EEB employees are highly motivated and take great pride in their work. EEB has received recognition for their high quality customer service. Due to an increase in global demand, greater competition and changes in technology, the finance director, Maia, has decided to upgrade EEB’s computers and/or software. Maia has two options: Option A: purchase only a new software called “Book-Fast” from a local software designer. Option B: purchase new computers with installed software called “Global Reach” from a manufacturer abroad.
The estimated return/total revenue in $ per year is shown below:
| Year | Discount factor at 4% |
|---|---|
| 1 | 0.9615 |
| 2 | 0.9246 |
| 3 | 0.8890 |
| 4 | 0.8548 |
Discount factors (reference only)
Easy E Booking (EEB)
Easy E Booking ( EEB ) is a small, well-known, reputable and financially stable online hotel reservation service. EEB employees are highly motivated and take great pride in their work. EEB has received recognition for their high quality customer service. Due to an increase in global demand, greater competition and changes in technology, the finance director, Maia, has decided to upgrade EEB's computers and/or software.
Maia has two options: manufacturer abroad.
[C International Baccalaureate Organization, 2013]
The estimated return/total revenue in $ per year is shown below:
The average rate of return (ARR) of Option A is 46.25 %.
Maia is considering using a straight line method of depreciation.
EEB employees favour Option A, even though some of their competitors using "Book-Fast" have reported problems with the software, including security issues. However, Maia has chosen Option B, which will provide more up-to-date, sophisticated and secure reservation system software. It will also give EEB a competitive advantage and an ability to handle a large global volume of hotel reservations.
Describe one strength and one weakness of EEB using a straight line method of depreciation.