Question

Exercise 2: A new IS project has been proposed that is expected to produce not only cost savings but also an increase in revenue. The initial capital cost to establish the system is estimated to be $500,000. The remaining cash flow data is presented in Table 2.10. Using a spreadsheet program, calculate the payback period, internal rate of return, and net present value for this project. Assume that the cost of capital is 7% and the effective tax rate is 40% How would the payback, internal rate of return, and net present value change if the capital cost for the project was $750,000 and the cost saving and increased revenue were decreased by 25% each year. Table:(1 2 3 4 5 6) = years Capital 500,000 Incresed Revenue $50 $75 $100 $115 $130 Cost Savings 110 125 125 125 125 Depreciation expense 150 125 100 75 50 Operating and maintenance epanse 75 50 50 50 50 all amounts are in hundreds and thousands Years are 2-6 values. Year 1 is starting with 500,000.

Answer 1