Perform a financial analysis for a project using the format provided in Figure 4-3. Assume the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $100,000 in Year 1 and $25,000 each year in Year 2, 3, and 4. Estimated benefits are $0 in Year 1 and $80,000 each year in Year 2, 3, and 4. Use an 8 percent discount rate. Create a spreadsheet (or use the business case financials template provided on the companion Web site) to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial analysis.
In the above excel worksheet I have calculated NPV, ROI, and year in which payback occurs.
NPV is 41,900 which is calculated by taking the total discounted benefits and subtract the total discounted costs. In this example, the NPV is $206,400 - $164,500 = $41,900.
Return on investment (ROI) is the result of subtracting the project costs from the benefits and then dividing by the cost. In the above example shows an ROI of 25 percent. ROI is calculated by using the formula as shown below:
ROI = (total discounted benefits – total discounted costs)/discounted costs
ROI = (206,400 – 164,500)/164,500 = 25%
Payback period is the amount of time it will take to recoup, in the form of net cost inflows, the total dollars invested in a project. In other words, payback analysis determines how much time will lapse before accrued benefits overtake accrued and continuing cost. Payback occurs when the net discounted cumulative benefits and costs reach Zero. In the above example, the cumulative benefits minus cost for Year 3 are (1,550). Adding that number to the discount benefited benefits minus costs for Year 4 results in $41,900. Since the number is positive, the payback occurs in Year 4.
Since the payback occurs in Year 4 which is a long period to recoup, the total dollars invested in a project. It may be a bit risk to invest the amount in this project. Since ROI of 25 percent which is good. By all this comparison, i recommend to invest in this project, based on financial analysis
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