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    C2 PsychoCeramic Sciences

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    muhammad haziq abdul ghani
    PsychoCeramic Sciences is considering installing new marketing software to improve inventory, sales, and delivery information for its pots and vases. The project would cost $315,000 initially and generate average annual profits of $75,900 over 10 years. The net present value is positive at $17,997, so the project is acceptable. Benefits are expected to start in year 3 and peak in year 5 at $120,000 before gradually declining over the remaining years.

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    C2 PsychoCeramic Sciences

    Uploaded by

    muhammad haziq abdul ghani
    137 views2 pages
    PsychoCeramic Sciences is considering installing new marketing software to improve inventory, sales, and delivery information for its pots and vases. The project would cost $315,000 initially and generate average annual profits of $75,900 over 10 years. The net present value is positive at $17,997, so the project is acceptable. Benefits are expected to start in year 3 and peak in year 5 at $120,000 before gradually declining over the remaining years.

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    PsychoCeramic Sciences is considering installing new marketing software to improve inventory, sales, and delivery information for its pots and vases. The project would cost $315,000 initially and generate average annual profits of $75,900 over 10 years. The net present value is positive at $17,997, so the project is acceptable. Benefits are expected to start in year 3 and peak in year 5 at $120,000 before gradually declining over the remaining years.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    137 views2 pages

    C2 PsychoCeramic Sciences

    Uploaded by

    muhammad haziq abdul ghani
    PsychoCeramic Sciences is considering installing new marketing software to improve inventory, sales, and delivery information for its pots and vases. The project would cost $315,000 initially and generate average annual profits of $75,900 over 10 years. The net present value is positive at $17,997, so the project is acceptable. Benefits are expected to start in year 3 and peak in year 5 at $120,000 before gradually declining over the remaining years.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    PsychoCeramic Sciences, Inc.

    (PSI), a large producer of cracked pots and other cracked items, is


    considering the installation of a new marketing software package that will, it is hoped, allow more
    accurate sales information concerning the inventory, sales, and deliveries of its pots as well as its vases
    designed to hold artificial flowers. The information systems (IS) department has submitted a project
    proposal that estimates the investment requirements as follows: an initial investment of $125,000 to be
    paid up-front to the Pottery Software Corporation; an additional investment of $100,000 to modify and
    install the software; and another $90,000 to integrate the new software into the overall information
    system. Delivery and installation is estimated to take one year; integrating the entire system should
    require an additional year. Thereafter, the IS department predicts that scheduled software updates will
    require further expenditures of about $15,000 every second year, beginning in the fourth year.

    They will not, however, update the software in the last year of its expected useful life. The project
    schedule calls for benefits to begin in the third year, and to be up-to-speed by the end of that year.
    Projected additional profits resulting from better and more timely sales information are estimated to be
    $50,000 in the first year of operation and are expected to peak at $120,000 in the second year of
    operation, and then to follow the gradually declining pattern shown in the table at the end of this box.

    Project life is expected to be 10 years from project inception, at which time the proposed system will be
    obsolete for this division and will have to be replaced. It is estimated, however, that the software can be
    sold to a smaller division of PSI and will thus have a salvage value of $35,000. PSI has a 12 percent hurdle
    rate for capital investments and expects the rate of inflation to be about 3 percent over the life of the
    project. Assuming that the initial expenditure occurs at the beginning of the year and that all other
    receipts and expenditures occur as lump sums at the end of the year, prepare the Net Present Value
    analysis for the project as shown in the table below.

    Year Inflow $ Outflow $ Net flow $ Discount Factor NPV


    A B C D=B-C 1/(1+k+p)^t D x Discount Factor
    2006* 0 125,000 -125,000 1.0000 -125,000
    2006 0 100,000 -100,000 0.8696 -86,957
    2007 0 90,000 -90,000 0.7561 -68,053
    2008 50,000 0 50,000 0.6575 32,876
    2009 120,000 15,000 105,000 0.5718 60,034
    2010 115,000 0 115,000 0.4972 57,175
    2011 105,000 15,000 90,000 0.4323 38,909
    2012 97,000 0 97,000 0.3759 36,466
    2013 90,000 15,000 75,000 0.3269 24,518
    2014 82,000 0 82,000 0.2843 23,310
    2015 65,000 0 65,000 0.2472 16,067
    2015 35,000 35,000 0.2472 8,651
    Total 759,000 360,000 399,000 - 17,997

    The Net Present Value of the project is positive and, thus, the project can be accepted. (The project
    would have been rejected if the hurdle rate were 14 percent.) Just for the intellectual exercise, note that
    the total inflow for the project is $759,000, or $75,900 per year on average for the 10 year project. The
    required investment is $315,000 (ignoring the biennial overhaul charges). Assuming 10 year, straight line
    depreciation, or $31,500 per year, the payback period would be:
    A project with this payback period would probably be considered quite desirable

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