Question

Assume monetary benefits of an information system of $50,000 the first year and increasing benefits of $5,000 a year for the next four years (year 1 = 50,000; year 2- 55,000; year 3 = 60,000; year 4 = 65,000; year 5 – 70,000). One-time development costs were $90,000 and recurring costs beginning in year 1 were $40,000 over the duration of the system’s life. The discount rate for the company was 10 percent. Using a 5-year horizon, calculate the net present value of these costs and benefits. Also calculate the overall return on investment of the project and then present a break-even analysis. At what point does break-even occur?

You must use formula MS Excel for your calculations in the worksheet

Answer 1

Year	Annual Monetary benefit	recurring cost	annual savings	present value of annual savings
0			-90000	-90000
1	50000	40000	10000	9090.90909
2	55000	40000	15000	12396.6942
3	60000	40000	20000	15026.296
4	65000	40000	25000	17075.3364
5	70000	40000	30000	18627.6397
		Net present value	sum of present value of cash flow	-17783.1246
		Overall rate of return	(average annual savings/initial investment)*100	22.22%
		Average annual savings	(10000+15000+20000+25000+30000)/5	20000
		initial investment		90000
		Year	annual savings	cumulative saving
		0	-90000
		1	10000	10000
		2	15000	25000
		3	20000	45000
		4	25000	70000
		5	30000	20000	amount to be recovered
		Break even point of time	Year before the final recovery+(amount to be recovered in final year/annual savings of final year)	4+(20000/30000)	4.67