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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,

  1. net present value (NPV)?
  2. ROI?
  3. 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

jeff jeffy answered 1 year ago
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