Question
In: Finance
EXERCISE 2: Cost and Benefit Analysis Techniques Assuming economic benefits of an information system at $95,000...
EXERCISE 2: Cost and Benefit Analysis Techniques
Assuming economic benefits of an information system at $95,000 at year 1, $125,000 at year 2, and $145,000 at year 3, development costs are $235,000 and operating costs are $15,000 at year 1, $16,000 at year 2, and $18,000 at year 3, a discount rate of 5%, and a 3-year time horizon,
- net present value (NPV)?
- ROI?
- break-even point (BEP)?
Please show all work.
Solutions
Expert Solution
A. NPV = 60954.54
| cash flows | year 1 | year 2 | year 3 |
| inflows | 95000 | 125000 | 145000 |
| development cost | -235000 | ||
| operating cost | -15000 | -16000 | -18000 |
| NET CASH FLOWS | -155000 | 109000 | 127000 |
| DISCOUNT RATE | 5% | ||
| NPV | $60,954.54 | ||
| ROI = NPV / SUM OF OUTFLOWS | 22.73% | ||
| BEP = development cost / INFLOWS - operating cost | 2.9375 | 2.155963303 | 1.850393701 |
B.
| present value of outflows | |||
| Year 1 | 250000 | 0.952380952 | 238095.2381 |
| year 2 | 16000 | 0.907029478 | 14512.47166 |
| year 3 | 18000 | 0.863837599 | 15549.07677 |
| 268156.786526 |
| ROI = NPV / SUM OF OUTFLOWS | 22.73% |
=60,954/268156 = 22.73%
C.
| BEP = development cost / INFLOWS - operating cost | 2.9375 | 1.75 | 1.394025605 |
| present value of outflows | |||
| Year 1 | 15000 | 0.952380952 | 14285.71429 |
| year 2 | 16000 | 0.907029478 | 14512.47166 |
| year 3 | 18000 | 0.863837599 | 15549.07677 |
| 44347.26271 | |||
| year 1 | 235000 | 0.952380952 | 223809.5238 |
| present value of intflows | |||
| Year 1 | 95000 | 0.952380952 | 90476.19048 |
| year 2 | 125000 | 0.907029478 | 113378.6848 |
| year 3 | 145000 | 0.863837599 | 125256.4518 |
| BEP = development cost / INFLOWS - operating cost | 2.9375 | 1.75 | 1.394025605 |
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