What to Do: Determine the NPV for the following: An information system will cost $95,000 to implement over a one-year period and will produce no savings during that year. When the system goes online the following year, the company will save $30,000 during the first year of operation. For the next four years, the savings will be $25,000 per year. In addition to the initial one-time development cost, for each year of operation, the operating cost will be 10% of the saving of that year. (1) Assuming a 5 percent discount rate, what is the NPV of the system? (2) What if the discount rate is changed to 12%? I set up the computation for you as shown in the table below for discount rate of 5%. Copy and paste the table in Excel and complete the NPV computation. Then you need to repeat the table to compute for 12% discount rate. Are these two cases economical viable? Submit your Excel spreadsheet of these two tables with your explanation on which project is economically feasible. NOTE: I will inspect the formula (See below) in the cells of the Factor row. DO NOT HARD CODE THE NUMBERS. YOU SHOULD NOT USE A FINANCIAL CALCULATOR TO DO THE COMPUTATION AND MANUALLY TYPE IN THE NUMBERS. DO NOT USE THE EXCEL NPVO FUNCTION. However, you can use it to validate your own computation. Note: Where r is the rate of return (discount rate) and n is the number of periods. For example, the PV factor of year 1 is equal to as shown in discount factor of Year 1. You will need to fill in the cells with ??? and compute the NPV. Net Present Value Analysis (Assuming a 5% discount rate) Information System Benefits and Costs: Year Year 1 Year 2 Benefits -- ???| ??? Factor (5%) 1 0.952381 ??? PV of Benefits T T ??? ??? Year 3 ??? ??? ??? Year 4 ??? ??? ??? Year 5 Total ??? ??? ?? ?? Costs Factor (5%) PV of Costs 95,000 ??? 1 0.952381 95,000 ??? ??? 777 ??? ??? 727272 7771 7221 222 ??? 777777 Net Present Value: ??? What to Do: Determine the NPV for the following: An information system will cost $95,000 to implement over a one-year period and will produce no savings during that year. When the system goes online the following year, the company will save $30,000 during the first year of operation. For the next four years, the savings will be $25,000 per year. In addition to the initial one-time development cost, for each year of operation, the operating cost will be 10% of the saving of that year. (1) Assuming a 5 percent discount rate, what is the NPV of the system? (2) What if the discount rate is changed to 12%? I set up the computation for you as shown in the table below for discount rate of 5%. Copy and paste the table in Excel and complete the NPV computation. Then you need to repeat the table to compute for 12% discount rate. Are these two cases economical viable? Submit your Excel spreadsheet of these two tables with your explanation on which project is economically feasible. NOTE: I will inspect the formula (See below) in the cells of the Factor row. DO NOT HARD CODE THE NUMBERS. YOU SHOULD NOT USE A FINANCIAL CALCULATOR TO DO THE COMPUTATION AND MANUALLY TYPE IN THE NUMBERS. DO NOT USE THE EXCEL NPVO FUNCTION. However, you can use it to validate your own computation. Note: Where r is the rate of return (discount rate) and n is the number of periods. For example, the PV factor of year 1 is equal to as shown in discount factor of Year 1. You will need to fill in the cells with ??? and compute the NPV. Net Present Value Analysis (Assuming a 5% discount rate) Information System Benefits and Costs: Year Year 1 Year 2 Benefits -- ???| ??? Factor (5%) 1 0.952381 ??? PV of Benefits T T ??? ??? Year 3 ??? ??? ??? Year 4 ??? ??? ??? Year 5 Total ??? ??? ?? ?? Costs Factor (5%) PV of Costs 95,000 ??? 1 0.952381 95,000 ??? ??? 777 ??? ??? 727272 7771 7221 222 ??? 777777 Net Present Value
