Question

A server in the HRIS Department requires an immediate investment (Year 0) of $322,000 and is expected to save money for the department according to the schedule below. The risk-adjusted discount rate for this investment is 11 percent.

Year	Cash Flows
1	$77,375
2	$ 88,000
3	$ 109,250
4	$ 67,100

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

Period (n)	Present Value Factor at 11% Discount Rate
1	.901
2	.812
3	.731
4	.659

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 server?



B) Do these measures support the server investment decision? Why or why not?

Answer 1

Solution A) The cash flows are as follow:

Year	Cash Flows	Present Value Factor	Discounted Cash Flows
0	-322000	1.000	-322000.0
1	77375	0.901	69707.2
2	88000	0.812	71422.8
3	109250	0.731	79882.7
4	67,100	0.659	44200.8
		Net Present Value	$                    -56,786.51

Present Value of inflows = 69707.2 + 71422.8 + 79882.7 + 44200.8 = $265213.5

Present value of outflows = 322000.0

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

Benefit cost ratio =  265213.5/322000 = 0.823644441 = 0.8236

Solution b) Since the NPV of the project is negative and also, the benefit cost ratio is less than 1, hence, the project should not be taken