Question

In: Finance

The development cost of the target application is estimated at = $705588 The lifetime of the...

The development cost of the target application is estimated at = $705588

The lifetime of the application is FOUR years. Lifetime = 4 years

The operation cost for each year is = $87055

The benefit derived from the execution of the target application for each year during its lifetime = $870558

The return rate of the other investments will be = 8%

calculate if the new application pays for itself? and when will it pay for itself?

PLEASE SHOW YOUR WORK, Thanks for your help.

Solutions

Expert Solution

Answer:-

In this case, we will calculate Net present value of the project as it is used in capital budgeting and taking decisions in investment planning in order to find out the profitability of an investment. It is actually the difference between the present value of cash inflows and the present value of cash outflows taken for a particular period.

Following is the Excel Worksheet showing the NPV calculation of the project:-

Following is the formula sheet of the above excel worksheet for easy understanding of the calculation:-

As the NPV of the new application is positive, so the new application pays for itself.

Within the first year itself, the development cost is recovered = Initial Investment/ Cash flow in year 1

= $705588 / $725465.7

=0.9726 year

The new application will pay itself in 0.9726 year.

jeff jeffy answered 1 year ago
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