Question

1. Construct a table showing the first-year costs, annual costs, and the annual benefits for the following investment proposal:

Costs:

• Initial investment (software, hardware, implementation) $180,000, incurred in year zero.
• Software maintenance (starting in year two) $30,000 per year, increasing at a rate of 3% per year thereafter

Benefits:

• Labor savings $140,000 per year, starting in year two
• Equipment savings $55,000, year one only.
• Increased clinic revenue, $50,000 per year, starting in year one.
• All yearly savings increase at the rate of inflation, assumed to be 3% per year.

Calculate the Net Present Value of this proposed investment at the end of the five-year planning cycle using a discount rate of 5%. Show your work. Assume that one-time costs are incurred in year zero, and annual costs and savings are incurred in years 1 through 5.

Answer 1

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Costs
Initital Investment	-1,80,000
Software Maintenance (applies inflation 3%)	-	-	-30,000	-30,900	-31,827	-32,782
Total Cost	-1,80,000	-	-30,000	-30,900	-31,827	-32,782
PV Factor 5%		0.9524	0.9070	0.8638	0.8227	0.7835
Present Value	-1,80,000	-	-27,210	-26,691	-26,184	-25,685	-2,85,770
Benefits
Labour Savings			1,40,000	1,40,000	1,40,000	1,40,000
Equipment Savings		55,000
Increased clinic revenue		50,000	50,000	50,000	50,000	50,000
Total Savings	-	1,05,000	1,90,000	1,90,000	1,90,000	1,90,000
Total Savings (Inflation applied 3%)		1,08,150	1,95,700	2,01,571	2,07,618	2,13,847
PV Factor 5%		0.9524	0.9070	0.8638	0.8227	0.7835
Present Value		1,03,002	1,77,500	1,74,117	1,70,807	1,67,549	7,92,975
						Net present Value	5,07,205