Turn To Part C Of The Systems Analyst's Toolkit And Review

Turn To Part C Of The Systems Analysts Toolkit And Review The Concept

Turn to Part C of the Systems Analyst’s Toolkit and review the concept of net present value (NPV). Determine the NPV for the following: An information system will cost $95,000 to implement over a one-year period and will produce no savings during that year. When the system goes online, the company will save $30,000 during the first year of operation. For the next four years, the savings will be $20,000 per year. Assuming a 12% discount rate, what is the NPV of the system? Write a response of approximately 300 words summarizing how you derived at your answer.

Paper For Above instruction

The concept of net present value (NPV) is a fundamental financial metric used to evaluate the profitability of investments or projects by considering the time value of money. Calculating NPV involves discounting expected future cash flows to their present values and subtracting the initial investment cost. In this scenario, the implementation of an information system requires a $95,000 investment spread over one year, with no immediate savings during that year. Once operational, the system is projected to generate specific annual savings over subsequent years. To accurately determine the NPV, I first identified the initial cost and the expected cash inflows from savings in the succeeding years.

The initial investment is $95,000, which is paid within the first year, but since there are no savings during that year, the cash flow for year zero is simply a cash outflow of $95,000. The savings begin from the year the system becomes operational—namely, Year 1—with $30,000, followed by $20,000 in Years 2, 3, 4, and 5. To determine the present value of these cash flows, I used the discounted cash flow formula, which discounts each future cash flow by (1 + r)^t, where r is the discount rate (12%) and t is the year number.

I calculated the present value (PV) of the savings in each year. For Year 1, PV equals $30,000 divided by (1 + 0.12)^1, which is approximately $26,785. For Years 2 through 5, I repeated this process, finding PVs of $20,000 divided by (1 + 0.12)^t for each year. The sum of these present values of the future savings was then subtract from the initial investment of $95,000 to compute the NPV. Summing the discounted cash inflows and subtracting the initial investment yields an NPV of approximately $13,732, indicating the project’s potential profitability given the assumptions.

This calculation demonstrates how the discounting process impacts the perceived value of future savings and underscores the importance of understanding the time value of money in project evaluation. Using NPV ensures that both the magnitude and timing of cash flows are appropriately considered in decision-making.

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