Perform a financial analysis for a project using the format. Assume the costs and benefits for this project are spread over four years as follows.
Estimated costs are $155,000 in Year 1 and $5,000 each year in Years 2, 3 and 4. The discount factors will automatically be recalculated. Estimated benefits are $0 in Year 1 and $42,000 each year in Years 2, 3 and 4.
Use a 12% discount rate (interest rate). Use given template to calculate NPV and ROI, and year in which payback occurs.
Show your work by attaching the completed template and write a paragraph explaining whether you would recommend investing in this project based on your financial analysis.
AN INTRODUCTION TO PROJECT MANAGEMENT, FOURTH EDITION
Figure. Intranet project NPV example (Schwalbe, Information Technology Project Management, Sixth Edition, 2010)
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Discount rate
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4%
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1
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2
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3
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4
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Total
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Costs
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150,000
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5,000
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5,000
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4,000
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Discount factor
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0.96
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0.92
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0.89
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0.85
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Discounted costs
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144,230.769
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4,622.781
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4,444.982
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3,419.217
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156,717.749
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Benefits
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0
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80,000
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80,000
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80,000
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Discount factor
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0.96
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0.92
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0.89
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0.85
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Discounted benefits
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0
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73,964.497
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71,119.709
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68,384.335
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213,468.541
4
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Discounted benefits - costs
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-144,230.769
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69,341.716
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66,674.727
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64/965.119
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56,750.792
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NPV
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Cumulative benefits - costs
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-144,230.769
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-74,889.053
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-8,214.326
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50750.792
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ROI
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0.362121027
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Payback In Year 4
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To determine NPV, follow these steps:
1. Determine the estimated costs and benefits for the life of the project and the products it produces. For example, the intranet project example assumed the project would produce a system in about six months that would be used for three years, so costs are included in Year o, when the system is developed, and ongoing system costs and projected benefits are included for Years 1, 2, and 3.
2. Determine the discount rate. A discount rate is the rate used in discounting future cash flows. It is also called the capitalization rate or opportunity cost of capital. In Figures 2-3 and 2-4, the discount rate is 10% per year, and in Figure 2-5, the discount rate is 8% per year.