Question

an information system will cost $95,000 to implement over a one-year period and will produce no savings during that year. When the system goes online the following year, the company will save $30,000 during the first year of operation. For the next four years, the savings will be $20,000 per year. Assuming a 5 percent discount rate, what is the NPV of the system

Answer 1

Given:
initial cost $95,000 to implement over a one-year period and will produce no savings during that year.
the company will save $30,000 during the first year of operation.
For the next four years, the savings will be $20,000 per year.
5 percent discount rate

Year      Future Value            Factor                Present Value
0                                                                       (95,000)
1               30,000                 (1+0.05)¹              28,571.43
2               20,000                 (1+0.05)²              18,140.59
3               20,000                 (1+0.05)³              17,276.75
4               20,000                 (1+0.05)⁴             16,454.05
5               20,000                 (1+0.05)⁵             15,670.52
Net Present Value                              1,113.34

Present Value = Future Value / Factor

The NPV of the system is 1,113.34