Question

Your firm has the option of making an investment in new software that will cost $188,522 today, but will save the company money over several years. You estimate that the software will provide the savings shown in the following table over its 5-year life, E . Should the firm make this investment if it requires a minimum annual return of 6% on all investments? The present value of the stream of savings estimates is $. (Round to the nearest dollar.) Should the firm make this investment if it requires a minimum annual return of 6% on all investments? (Select the best answer below.) 0 Ο Yes Νο

Answer 1

1: PV of the savings = CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n

= 48000/1.06^1+67200/1.06^2+62400/1.06^3+33600/1.06^4+19200/1.06^5

=198445

2: Yes

(Since the PV of savings is more than the initial cost)