Assume monetary benefits of and information system of $40,000 the first year and

Question

Assume monetary benefits of and information system of $40,000 the first year and increasing benefits of $10,000 a year for the next five years (year 1 = $50,000, year 2 = $60,000, year 3 = $70,000, year 4 = $80,000, year 5, = $90,000). One-time development costs were $80,000 and recurring costs were $45,000 over the duration of the system%u2019s life. The discount rate for the company was 11 percent. Using a six-year time horizon, calculate the net present value of these costs and benefits. Also, calculate the overall return on investment and then present a break-even analysis. At what point does break-even occur?

Explanation / Answer

Present value

total benefit = (40+50+60+70+80+90)*1000 = 390000

total cost = 89/100(80 + 45 + 45+ 45+45+45+45)*1000 = 311500

overall return = 78500

let us consider breakeven occurs after x years

so 89/100(80+ 45x)*1000=(40x+10(x-1))*1000

=> 89/100(80+45x) = 50x -10

=> 89*80/100 + 10 = 50x - 89*45x/100

=>81.2 = 9.95x

=> x = 8.160 years

we shall take it as 8 years as an approximate

exact would be 8 years 1 month 28 days

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