Question

Assume a district library is considering purchasing a new information system that would give users access to a number of online databases for five years.

Should this project be done?

•The benefits of the system are estimated to be $100 000 per annum.

•The information system initially costs (set-up included) $325 000.

•It costs $20 000 each year to operate and maintain the system.

•After 5 years the system will be dismantled and sold, resulting in a net cash inflow of $20 000.

•The appropriate discount rate is 7%.

Please show your calculation and give explanations.

Answer 1

Using the Present worth Method to evaluate whether the project is to be done or not.

Initial Cost = 325 000

Annual Benefit from the system = 100 000 per annum

Annual Maintenance and operating cost = 20 000 each year

Salvage Value = 20 000

Discount rate = 7%

Project Life = 5 years

NPW = - 325 000 - 20 000 (P/A, 7%, 5) + 100 000 (P/A, 7%, 5) + 20 000 (P/F, 7%, 5)

NPW = - 325 000 - 20 000 (4.1002) + 100 000 (4.1002) + 20 000 (0.7130)

NPW = 17,276

Project of purchasing the new information system should be purchased because the benefits from the project is more than its costs.