Question

Assuming monetary benefits of a project at $85,000 per year, one-time costs of $75,000, recurring costs of $35,000 per year, a discount rate of 12 percent, and a 5-year time horizon. Please

1. calculate the net benefit
2. calculate the overall return on investment (ROI) of the project
3. Estimate the break-even point

PV_n = Y /(1+i)ⁿ    the present value of year n with the discount rate i

ROI = (Net Benefit)/(Total Cost)

During the year with a positive overall cash flow, then

Break-Even Point = (Yearly Cash Flow – Overall Cash Flow)/(Yearly Cash Flow)

Answer 1

Initial investment = 75,000

Per year costs = 35,000

Benefit each year = 85,000

Discount rate = 12%

Time = 5 years

Net cash inflow each year = (85,000 - 35,000) = 50,000

PV = discounted net cash inflow each year at 12% for 5 years

PV = 50,000 (PVIFA) at 12% for 5 years

PV = 50,000 * 3.6048

PV = 180,240

Net benefit = PV - Initaial Investment

= 180,240 - 75,000

= $ 105,240

Total cost = Initial cost + cost eact year

= 75,000 + 5 * 35,000

= 75,000 + 175,000

= 250,000

ROI = Net benefit/Total initial cost *100%

= (105,240/250,000) *100%

= (0.42096)*100%

= 42.096%

Break even point is the point at which total cash outflow is equal to total cash inflow. it is essentially payback period.

So, initial investment = 75,000

Net cash inflow each year = 85,000 - 35,000 = 50,000

Payback period = Initial investment/Net cash inflow each year

= 75,000/50,000

= 1.5 years

So, break even point is 1 year and 5 months.