Problem and Exercise question 11.

Assuming monetary benefits of an information system at $95,000 per year, one-time costs of $75,000, recurring costs of $50,000 per year, a discount rate of 9 percent, and a five-year time horizon, calculate the net present value of these costs and benefits of an information system. Also calculate the overall return on investment of the project and then present a break-even analysis. At what point does break-even occur?

Some helpful pointers:

a. Fill in the chart provided (some answers already given to you) the chart is on the next page. You must provide answers for all of the fields in the table filled in orange.

b. Calculate the discount rate using the formula rate = 1/(1 + i)n where i is the rate, so 9 percent = 0.09 and n = the years, so, for example, in the third year, n would be that expression cubed (to the third power). Discount rate results should be FIVE decimal places, such as 0.85430.

c. You dont need to include the decimal places in your monetary answers.

d. Overall ROI and break-even fraction should be THREE decimal places, such as 0.743 (of a year)

e. Give your break-even point in terms of decimal places, and then compute that in months below the chart. So, for example, if your break-even date comes in between year one and two, say, at .321, then it would be at 1.321 years. This computes to one year and 3.852 months. (of course, this is not the answer). So you need to express your answer as BOTH a decimal (1.321 years) AND the number of years and months (1 year, 3.852 months). DO NOT just express your answer in terms of one or the other, express it in terms of BOTH.

f. Even if your Overall ROI computes to a negative percent, express it as a positive percent.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Totals Net Economic Benefit Discount Rate (.09) PV of Benefits SO$95,000 $95,000 $95,000 $95,000 $95,000 S0 NPV of all Benefits One-time Costs $0 $75,000.00 Recurring Costs Discount Rate (.09 PV of Recurring Costs $0 ($50,000 ($50,000 ($50,000) ($50,000 S0 NPV of all Costs $75,000 Overall NPV Overall ROI Break-even Analysis Yearly NPV Cash Flow Overall NPV Cash Flow $75,000 ($75,000) Proiect break even occurs between 1 and 2 vears Use first year of positive cash flow to calculate break-even fraction Actual break even occurs at