Company XYZ has decided to build an accounts receivable application. The project was estimated to take 2 years to complete.
It was estimated that the project will have a one-time implementation cost of $2M over the 2 year development phase.
Beginning in the 3rd year, the project will have a recurring expense of $25,000 per year for additional Oracle licenses.
Upon rollout of the application in year 3, Company XYZ will no longer need its mainframe computer at a saving of $325,000 per year.
- Assume a maximum life for the application to be 10 years from date of deployment. (12 years from now)
- Assume that for all benefits and costs calculations, the benefit and cost are received/expensed at the end of each year
- Assume that for the one-time implementation cost $1M is expensed at the end of year 1, and $1M at the end of year 2
- Assume a discount rate of 6% Making a discount factor of:
Year (1) .9434 (2) .8900 (3) .8396 (4) 0.7921 (5) .7473 (6) .7050 (7) .6651 (8) .6274 (9) .5919 (10) .5584 (11) .5268 (12) ????
1.Compute the discount rate for year 12
2.What is the total Net Present Value of the benefit and cost derived by implementing this project?
3.What is the Return on Investment for this project
4.When is the Break-Even point for this project
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