Question & Answer: You are asked to conduct a six-year (Year 0 to Year 5) economic feasibility study. Based on project schedule, you co…..

You are asked to conduct a six-year (Year 0 to Year 5) economic feasibility study. Based on project schedule, you conclude that the system will not be in operation during the current year (Year 0). Once the system is operational in the following year (i.e. Year 1), you expect annual benefits from increased sales of $50,000 and inventory cost reduction of $13,000. Additionally, you also estimate that there will be extra system benefit that will increase $3,500 annually (from the previous year) from Year 2 through Year 5 (i.e. $3,500 on Year 2, $7,000 on Year 3, etc). The system development cost is estimated at $110,000. The software license renewal and supplies will be $15,000 annually from Year 1 on. The initial personnel cost (incurred in Year 1) for hiring and training operators is $12,000, which will increase annually at a rate of 3% thereafter.

1) The discount rate is 7%. What is the ROI for the project?

2) Is there a break-even point in the seven-year time horizon? If so, when?