11-40 Sensitivity Analysis Mack and Myer, LLP, a law firm, is considering the replacement of its old accounting system with new software that should save $10,000 per year in net cash operating costs. The old system has zero disposal value, but it could be used for the next 5 years. The estimated useful life of the new software is 5 years with zero salvage value, and it will cost $40,000. The required rate of return is 14%. 1. What is the payback period? 2. Compute the NPV. 3. Management is unsure about the useful life. What would be the NPV if the useful life were (a) 3 years instead of 5 or (b) 10 years instead of 5? 4. Suppose the life will be 5 years, but the savings will be $8,000 per year instead of $10,000. What would be the NPV? 5. Suppose the annual savings will be $9,000 for 4 years. What would be the NPV? TABLE B-1 Present Value of $1 Period 1 234+ 2 5 10 6 .8375 .7903 .7462 .7050 7 6 9 10 11 12 012 3971 13 14 15 .6810 .6006 .5303 4688 .4150 .6611 .5775 .5051 .6419 .5553 4810 67 16 .6232 .5339 4581 17 18 5874 4% 5% 6% 7% 8% 10% 12% 3% 14% 16% 24% 25% 26% 18% 20% 22% .9091 .8475 .8333 .8197 .8065 .9709 .8929 .8772 .8621 .8000 .7937 .9615 .9524 9434 9346 .9259 .9426 .9246 .9070 8900 .8734 .8573 .8264 .7972 .7695 .7432 .7182 .6944 .6719 .6504 .6400 .6299 5787 5507 5245 5120 .4999 .9151 .8890 .8638 .7513 .7118 .6750 .6407 .6086 .8396 .8163 .7938 .8885 .8548 8227 .7921 .7629 .7350 .6830 .6355 5921 .5523 5158 4823 4514 4230 4096 3968 .5194 4761 4371 .5674 4019 3700 3411 3277 3149 .8626 8219 .7835 .7473 7130 .6806 .6209 .2751 .2621 2499 .6663 .6302 5645 .5066 4556 .4104 .3704 3349 3033 .1983 .3139 .2791 2486 2218 .2097 .8131 .7599 .7107 .6651 .6227 .5835 .5132 .4523 3996 .3538 .1789 .1678 1574 .7894 .7307 .6768 .6274 .5820 5403 .4665 .4039 3506 .3050 2660 2326 .2038 1249 1670 1443 1342 .2255 1938 .3606 3075 .2630 .7664 .7026 .6446 .5919 .5439 5002 .4241 .2267 .2697 .1911 .1615 .1369 1164 1074 .0992 .7441 .6756 .6139 5584 .5083 .4632 .3855 .3220 .0787 1346 1122 0938 .0859 .4289 .2875 .2366 .1954 1619 .3505 5847 5268 .4751 .7224 .6496 1122 .0920 .0757 .0687 .062 .3186 .2567 .2076 1685 1372 .7014 .6246 5568 4970 4440 .2292 1821 1452 1163 .0935 .0754 .0610 .0550 .049 .3677 .2897 .0618 .0492 0440 .03 .2633 .2046 .1597 .1252 .0985 .0779 4423 .3878 .3405 0352 03 .1401 .1079 .0835 .2394 .1827 .0649 .0507 .0397 .3624 .3152 4173 .0415 0320 .0281 .2176 .1631 1229 .0930 .0708 .0541 .3936 3387 .2919 .0 .0340 0258 .0225 .1078 .0802 .0600 .0451 .1978 .1456 3714 .3166 2703 .6050 .5134 4363 .0691 .0508 .0376 .0279 0208 0180 0 .2959 .2502 .1799 .1300 .0946 .3503 4936 4155 0144 .0 3212 0220 0168