During the first year software will be purchased from a reputable vendor for $3,000,000. An internal team aided by a hired consulting is also used. The payroll for the internal team is $500,000 for the first year and increases by $500,000 in years two and three. Also, $500,000 will be spent on consulting during the first year and $1,000,000 during each of years two and three. $2,000,000 will need to be invested in hardware during the second year and an additional $500,000 investment in hardware will be needed for year three. $200,000 in training will be needed the first year, $500,000 the second year, and $2,000,000 the third year. Management considers the expenditures for the first three years as investment in the system.   Management estimates the operating cost of the system to be $2,500,000 (for personnel and other costs) in year 4 and to grow by 6% per year for years 5 through 10. The benefits are estimated to be $4,000,000 for year 4 and to grow by 30% per year for years 5 through 10. The company has a 22% cost of capital to evaluate projects. What is the Net Present Value (NPV), Return on Investment (ROI) and Internal Rate of Return (IRR) for the project? What is the payback period for the project?

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter9: Decision Making Under Uncertainty
Section: Chapter Questions
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During the first year software will be purchased from a reputable vendor for $3,000,000. An internal team aided by a hired consulting is also used. The payroll for the internal team is $500,000 for the first year and increases by $500,000 in years two and three. Also, $500,000 will be spent on consulting during the first year and $1,000,000 during each of years two and three. $2,000,000 will need to be invested in hardware during the second year and an additional $500,000 investment in hardware will be needed for year three. $200,000 in training will be needed the first year, $500,000 the second year, and $2,000,000 the third year. Management considers the expenditures for the first three years as investment in the system.

 

Management estimates the operating cost of the system to be $2,500,000 (for personnel and other costs) in year 4 and to grow by 6% per year for years 5 through 10. The benefits are estimated to be $4,000,000 for year 4 and to grow by 30% per year for years 5 through 10.

The company has a 22% cost of capital to evaluate projects. What is the Net Present Value (NPV), Return on Investment (ROI) and Internal Rate of Return (IRR) for the project? What is the payback period for the project?

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9781337406659
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Cengage,