Question
A new IS project has been proposed that will produce not only cost savings but also an increase in revenue. The initial costs to establish
A new IS project has been proposed that will produce not only cost savings but also an increase in revenue. The initial costs to establish the system are estimated to be $500,000.
The remaining cash flow data is presented in the following table.
|
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Increased Revenue | $0 | $100 | $150 | $200 | $250 |
| Cost Savings | $0 | $ 50 | $ 50 | $ 50 | $ 50 |
| Depreciation | $0 | $ 75 | $ 75 | $ 75 | $ 75 |
| Initial Expense | $500 |
|
|
|
|
Note: All amounts are in 000s.
a. calculate the return on investment (ROI) for this project. Assume that the cost of capital is 7 percent.
b. How would the rate of return change if the project delivered $50,000 in additional revenue and generated cost savings of $25,000 in the first year?
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Fundamentals of Financial Accounting
Authors: Fred Phillips, Robert Libby, Patricia Libby
5th edition
978-0078025914
