BA - Cost Benefit Analysis New Billing System Cost Benefit Analysis A new automated premium billing system has been recommended by outside consultants. The requirements have been defined and we are now ready to perform the cost benefit analysis. The system will cost $50,000 to build. It has been determined that the economic life of the new system will be 5 years, after its installation one year from now. At the end of the period, the data base can still be used in the replacement system, saving approximately $10,000. The current system's operating costs are estimated to be $100,000 per year but the operating costs for the new system are only $75,000 per year. The new system has additional intangible benefits of $10,000 per year. All estimates of costs and benefits are increasing at a rate of 10% per year for both the current and new systems. The required rate of return for the company is 15%. Use the Excel template to help you calculate.

W6_2 Cost-Benefit Example (2) Solution Year 0 1 2 3 4 5 Cost Dev Cost (50000) Operation Cost(10\% increase yearly) 0 (75000) total Cost (50000) (75000) Discount factor (10\%) 1.00000.9091 PV of cost (50000) (68182) Cumulative PV of Costs (50000) (118182) Benefit Tangible Benefits(10\% increase yearly) 100001000 Total Benefit Discount Factor (10\%) 1.00000.9091 PV of Benefits 9091 Cumulative PV of Benefits 9091 Cumulative PV of Benefit+Cost (50000) (109091) Residual value 5 year total (with residual value) 10000 Current System Cost (100000) (100000) (110000) Cumulative current system cost (100000) (200000) (310000) New System Total Saving 10000