Lab Exercise

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.

Do not include salvage value

Provide and in Excel

a. Using a spreadsheet program, 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?