Question

An applicant tracking system in the Recruiting Department requires an immediate investment (Year 0) of $319,000 and is expected to save money for the department through lower average cost per hire according to the schedule below. The firm’s weighted average cost of capital is 9 percent (which may be used as the discount rate for average-risk investments as well as this applicant tracking system).

Year	Cash Flows
1	$77,375
2	$88,007
3	$59,750
4	$19,400

The Present Value of $1 Table (Table 3) tells us:

Period (n)	Present Value Factor at 9% Discount Rate
1	.917
2	.842
3	.772
4	.708

Formulas:

Net present value = Present value of cash inflows – Present value of cash outflows

Benefit cost ratio = Present value of cash inflows
                              Present value of cash outflows

A) What is the Net Present Value (NPV) and Benefit Cost Ratio (BCR) of investing in this applicant tracking system?


B) Do these measures support the applicant tracking system investment decision? Why or why not?

Answer 1

a)

Years	Cash flow	Discount factor @ 9%	Present Value
0	-$3,19,000	1	-$3,19,000
1	$77,375	0.917	$70,953
2	$88,007	0.842	$74,102
3	$59,750	0.772	$46,127
4	$19,400	0.708	$13,735
	NPV ($70953+$74102+$46127+$13735-$319000)	-$1,14,083

Benefit Cost Ratio = ($70953+$74102+$46127+$13735)/$319000
	=0.64

b)	These measures help in investment decisions, the Net cash flows in
	Present value discounted at the companies cost of capital is negative which means that the outflow is more than the inflow expected.
	Also BCR is less than 1 and thus this investment is not beneficial to the company.