a new IS project has been proposed that is expected to produce not only cost sav

Question

a new IS project has been proposed that is expected to produce not only cost savings but also an increase in renvenue. The initial capital cost to establish the system is estimated to be $500,000. The remaining cash flow data is presented in the picture.

1. using a spreadsheet program, calculate the paybcak period, internal rate of return, and net present value for this project. Assume that the cost of capital is 7 percent and the effective tax rate is 40 percent.

PLEASE BE SURE THAT USING THE FORMULAS IN THE EXCEL

Explanation / Answer

Finance related Formula(s):

Cost of Capital = 7% = (0.07)

Effective Tax Rate = 40% = (0.40)

Pay Back Period Calculation for IS Project Year 2010 Year 2011 Year 2012 Year 2013 Year 2014 project's Cost intial Investment 500,000 500,000 500,000 500,000 500,000 Inward Cash per annum 160,000 200,000 225,000 240,000 255,000 Pay back period or break even point 3.125 2.5 2.22222222 2.08333333 1.96078431 Internal Rate of Return 23% -8% -20% -23% Net Present Value (NPV) Retrun in year 2010 160,000 Retrun in year 2011 200,000 Return in year 2012 225,000 Return in year 2013 240,000 Return in year 2014 255,000 Cost of Capital = 7% 0.07 Effective Tax Rate = 40% 0.4 The data from the question: Capital 500,000                                                  Year 2010 2011 2012 2013 2014 Increased Revenue 50,000 75,000 100,000 115,000 130,000 Cost Savings 110,000 125,000 125,000 125,000 125,000 Depreciation expense -150,000 -125,000 -100,000 -100,000 -50,000 Operating and maintanenace expense -75,000 -50,000 -50,000 -50,000 -50,000

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