Your firm has the option of making an investment in new software that will cost $130,000 today and is estimated to provide the following savings: $35000, $50000, $45000, $25000, $15000 for year 1 through year 5. Should the firm make this investment if it requires a minimum annual return of 9% on all investments?

Question

Business

Valentina Pierce

28 November, 16:21

Your firm has the option of making an investment in new software that will cost $130,000 today and is estimated to provide the following savings: $35000, $50000, $45000, $25000, $15000 for year 1 through year 5. Should the firm make this investment if it requires a minimum annual return of 9% on all investments?

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Answers (1)

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Julianne Decker · Answer 1

Since the net present value from the cash flow projections is positive, therefore the investment is making return of more than 9% and hence the project shall be accepted.

Explanation:

We will calculate the net present value of the cash flows given in the question by using the minimum rate of 9% and if the net present value is positive then the investment shall be made and if the net present value is negative then the investment shall not be made.

Year Cash flows Present value is 9%

0 ($130,000) ($130,000)

1 $35,000 $32,110.09

2 $50,000 $42,084

3 $45,000 $34,748.26

4 $25,000 $17,710.63

5 $15,000 $9,748.97

Net present value $6,401.95

Since the net present value from the cash flow projections is positive, therefore the investment is making return of more than 9% and hence the project shall be accepted.