Assume that you adopt a custom software package. Using present value tables, evaluate the cost vs....

Free

90.2K

Verified Solution

Question

Accounting

Assume that you adopt a custom software package. Using presentvalue tables, evaluate the cost vs. benefit of a system under thefollowing scenario: The probable cost of the best package isestimated at $20 million to implement. While there are no benefitsin the first year, you estimate the system will save the company anet of $4 million the second year after costs and $6 million forthe next three years. Interest rate is 2%. Your cost vs. benefitanalysis should indicate the total and yearly benefits anddiscounted costs. Will the project make money at the 2% interestrate? This exercise involves a capital budgeting decision using thenet present value method. This method considers the estimated netcash flows for a project's expected life. You can use the followingformat for your analysis. Alternatively, you can list the yearsusing a vertical format. Year 1 Year 2 Year 3 Year 4 Year 5Benefits Discounted Total Discounted Value Summarize your findingsin an executive summary table with information for easycomparability.

Answer & Explanation Solved by verified expert

4.2 Ratings (521 Votes)


Cash Flow
Year	Cash Flow	Present Value Factor	Present value
	(1)	(2)	(3)
0	$ (20.00)	1	$ (20.00)
1	$ -	0.9804	$ -
2	$ 4.00	0.9612	$ 3.84
3	$ 6.00	0.9423	$ 5.65
4	$ 6.00	0.9238	$ 5.54
5	$ 6.00	0.9057	$ 5.43
NPV			$ 0.48

Findings
Since the NPV (i.e. Net Present Value ) is positive it is recommended to go for the customized software package


Notes
Present Value is calculated as cash flow multiplied by present value factor
All calculations are done in Millions
Interest rate used for calculating resent present value factor is 2%

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Assume that you adopt a custom software package. Using presentvalue tables, evaluate the cost vs. benefit of a system under thefollowing scenario: The probable cost of the best package isestimated at $20 million to implement. While there are no benefitsin the first year, you estimate the system will save the company anet of $4 million the second year after costs and $6 million forthe next three years. Interest rate is 2%. Your cost vs. benefitanalysis should indicate the total and yearly benefits anddiscounted costs. Will the project make money at the 2% interestrate? This exercise involves a capital budgeting decision using thenet present value method. This method considers the estimated netcash flows for a project's expected life. You can use the followingformat for your analysis. Alternatively, you can list the yearsusing a vertical format. Year 1 Year 2 Year 3 Year 4 Year 5Benefits Discounted Total Discounted Value Summarize your findingsin an executive summary table with information for easycomparability.