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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started