Question

Your firm has the option of making an investment in new software that will cost $130,000 today and is estimated to provide the savings shown in the following tableover its 5 year life.
Year Savings estimate
1 $35,000
2 50,000
3 45,000
4 25,000
5 15,000
Should the firm make this investment if it requires a minimum annual return of 9% on all investments?

Answer 1

The investment decision about the project can be taken based on the NPV of the project.

NPV is the net present value of the cash flows. It is the difference of the present value of cash inflows and present value of cash outflows.

Investment in new software will result in cash outflows of $130,000 today.

The net present value (NPV) can be calculated using the spreadsheet as follows:

Following are the obtained results:

According to NPV decision criterion, the net present value (NPV) of cash flows is positive that is .

Hence the firm is suggested to make this investment.