Question

Assume that you adopt a custom software package. Using present value tables, evaluate the cost vs. benefit of a system under the following scenario: The probable cost of the best package is estimated at $20 million to implement. While there are no benefits in the first year, you estimate the system will save the company a net of $4 million the second year after costs and $6 million for the next three years. Interest rate is 2%. Your cost vs. benefit analysis should indicate the total and yearly benefits and discounted costs. Will the project make money at the 2% interest rate? This exercise involves a capital budgeting decision using the net present value method. This method considers the estimated net cash flows for a project's expected life. You can use the following format for your analysis. Alternatively, you can list the years using a vertical format. Year 1 Year 2 Year 3 Year 4 Year 5 Benefits Discounted Total Discounted Value Summarize your findings in an executive summary table with information for easy comparability.

Answer 1

Cash Flow
Year	Cash Flow	Present Value Factor	Present value
	(1)	(2)	(3)
0	$          (20.00)	1	$           (20.00)
1	$                 -	0.9804	$                  -
2	$              4.00	0.9612	$              3.84
3	$              6.00	0.9423	$              5.65
4	$              6.00	0.9238	$              5.54
5	$              6.00	0.9057	$              5.43
NPV			$              0.48
Findings
Since the NPV (i.e. Net Present Value ) is positive it is recommended to go for the customized software package
Notes
Present Value is calculated as cash flow multiplied by present value factor
All calculations are done in Millions
Interest rate used for calculating resent present value factor is 2%