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20 May, 09:31

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 $20,000 per year. Assuming a 5 percent discount rate, what is the NPV of the system

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  1. 20 May, 09:54
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    Given:

    initial cost $95,000 to implement over a one-year period and will produce no savings during that year.

    the company will save $30,000 during the first year of operation.

    For the next four years, the savings will be $20,000 per year.

    5 percent discount rate

    Year Future Value Factor Present Value

    0 (95,000)

    1 30,000 (1+0.05) ¹ 28,571.43

    2 20,000 (1+0.05) ² 18,140.59

    3 20,000 (1+0.05) ³ 17,276.75

    4 20,000 (1+0.05) ⁴ 16,454.05

    5 20,000 (1+0.05) ⁵ 15,670.52

    Net Present Value 1,113.34

    Present Value = Future Value / Factor

    The NPV of the system is 1,113.34
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