Question

National Rodeo Association, a not-for-profit organization, is considering purchasing a new enterprise software system for $75,000. This investment is projected to have an seven-year useful life, and a salvage value of $10,000; the investment is projected to save the organization approximately $14,000 each year in operating costs. In addition to the cost of the software system, the association needs an increase of $6,000 in net working capital (other than cash) in the first year, which will not be released (that is, converted back to cash) until the end of seven years.

Required:

1. What is the payback period for this proposed investment? (Assume that the cash flows, other than salvage value, occur evenly throughout the year. Round your answer to 2 decimal places, e.g., 2.452 years = 2.45 years.)

2. If the Association has a required rate of return of 9 percent, what is the net present value (NPV) of the proposed investment? Round your calculation to whole dollars (i.e., zero decimal points).

Answer 1

1)
	Initial Investment
	Cost of new software		$         75,000
	Working Capital		$           6,000
	Total		$         81,000
	Annual cash inflow		$   14,000.00
	Payback period = Initial Investment / annual cash inflow
	=$81000/14000
	=5.79 years
2)	Calculation Of NPV
a	Annual net cash inflow	$            14,000
b	PV Annuity Factor (9%,7 years)	5.0330
c	PV of annual cash flow (a*b)	$      70,461.34
d	Release Of Working Capital	$        6,000.00
e	PV Factor for 7th year	0.5470
f	PV of working capital	$        3,282.21
g	Salvage Value	$            10,000
h	PV Factor for 7th year	0.54703
i	PV of Salvage Value (g*h)	$        5,470.34
j	Initial Investment	$            81,000
k	NPV (c+i+f-j)	$            -1,786