Question

1. Assume it is September 1^st, 2017. Sylvester “Sly” Weezel, a salesman at Jim’s Jags, wants to sell you a brand new Jaguar XJ sedan for $79,999.99  Just as you’re preparing to hand over the full amount in cash, Sly says that, because your business is so valuable to Jim’s Jags, the firm’s financing aficionado, Fiscally Fast Frankie, will accept your payment on an installment plan: $29.000 per year for 3 years. The 1^st payment would be due today, on September 1^st, 2017. The 2^nd payment would be due on September 1^st, 2018, and the 3^rd payment would be due on September 1^st, 2019. Assuming a discount rate of 5%, determine whether it is better for you to pay cash or to accept the terms of this installment plan. Explain your answer and show calculations.

2. A potential software project will cost $17000 now, $2000 one year from now, $1000 2 years from now, and $1000 3 years from now. It will provide benefits of $28000 after it is installed 1 year from now, $30000 2 years from now, and $35000 3 years from now. Calculate the Present Value of the costs and benefits for each year and the overall Net Present Value of the project. Use a discount rate of 3%.

	Year 0	Year 1	Year 2	Year 3
Benefits	$0	$28,000	$30,000	$35,000
PV of Benefits	?	?	?	?	Total Benefits
Costs	$17,000	$2,000	$1,000	$1,000
PV of Costs	?	?	?	?	Total Costs

3. The Payback Period is the length of time required to recover the cost of an investment. Management uses Payback Period to assess the risk of an investment – the longer the Payback Period, the higher the investment risk. What is the Payback Period for the project in question #2 above?

4. A project’s Return On Investment (ROI), can be defined as

What do I get back ('return') for the money
I'm being asked to spend ('investment')?
What is it really worth (the "ROI")?

ROI = NPV / Total Cost    (expressed as a percentage)

What is the ROI for the project in question #2 above?  

Answer 1

Ans 2)

Present Value of benefits for 0 year=$0

Present Value of benefits for 1st year=28000/1.03=27184.5

Present Value of benefits for 2nd year=30000/1.03^2=28277.9

Present Value of benefits for 3rd year=35000/1.03^3=32029.95

PV of total benefits=87492.35

Present Value of Cost for 0 year=17000

Present Value of Cost for 1 year=2000/1.03=1943.79

Present Value of Cost for 2 year=1000/1.03^2=942.55

Present Value of Cost for 3 year=1000/1.03^3=915 15

Total PV of Costs=20800.35

Net PV = PV of Benefits-PV of costs=87492.35-20800.5=66600.85

Ans 3)

Payback period is the time period in which cost is recovered from benefits

If we consider PV of total benefits it is less than $21000 hence this cost can be recovered in 1 year

Payback period is 1 year

Ans 4)

Return on invrinvest=NPV/Total Cost=66600.85/20800.5=320.18%