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devan.k (Querist)
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25 November 2008 Problem statement: A new inventory management system for Argie Inc.
could be developed at a cost of $250,000. The estimated operating
costs and estimated benefits over six years of operation would be:

Year Costs Benefits
0 $250,000 $ 0
1 7,000 52,000
2 9,400 68,000
3 11,000 82,000
4 14,000 115,000
5 15,000 120,000
6 16,000 120,000

- Assuming a 10% discount rate, what is this investment's NPV?
- What is the ROI for this investment?
- What would the payback period be for this investment?
- What is the IRR?
- Would it be a good or bad investment? Why?

- The time value of money refers to the concept of comparing present
cash outlays to future expected returns. A dollar today is worth more
than a dollar one year from today because money can be invested. The
rate at which money can be borrowed or invested is called the discount
rate (symbolized with an r).
- The present value (PV) is a measure of the time value and
represents the current value of a future cash flow (or CF).
– Net Present Value (NPV): The calculation of the discounted projected
cash flows of the investment over a number of periods (typically
years) . The NPV formula is as follows:

where n is the number of periods over which the calculation is applied

Note that each cashflow CFi can be positive or negative. Period
0 typically signals initial
investment

- Internal Rate of return (IRR): The discount rate r that makes NPV
equal zero . Can be seen as a threshold discount rate above which
the project/ investment renders some net present value. Can bes
estimated as the discount rate that will make the present value of the
projected cash flows equal to the investment

- The return on investment (ROI) is the ratio of the net cash receipts
of the project divided by the cash outlays of the project
- Payback period: Time required for the investment/project to become break even

Taranjit Singh

Taranjit Singh (Expert)
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07 October 2009 Hello, is this an old query still pending? You can send me a Pm if yes....I m trying to take all old pending queries in Accounting Forum......Thanx.

Taranjit Singh

Taranjit Singh (Expert)
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07 October 2009 Hello, is this an old query still pending? You can send me a Pm if yes....I m trying to take all old pending queries in Accounting Forum......Thanx.

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