Cost/Benefit Analysis of a New Leasing System
What are the developmental costs, operating costs, and benefits of a new leasing system?
Developmental costs: $56000
Operating costs: $6000, decrease by $500 each year
Annual benefits: $27,000
Answer:
To analyze the cost-benefit, create a spreadsheet that includes columns for costs (which decrease yearly), benefits, net cash flow, discount factors, and discounted cash flows. With these figures, you can calculate the NPV, ROI, and payback period.
Explanation:
To analyze the cost-benefit of this leasing system, you need to create a spreadsheet. Set up columns for year, costs, benefits, net cash flow, discount factor, and discounted cash flows. For the costs, don't forget it decreases by $500 each year. Here is the setup for the first 3 years:
- Year 1: Development cost = $56000, Operating cost = $6000, Benefit = $27000, Cost = $62000, Net cash flow = -$35000
- Year 2: Operating cost = $5500, Benefit = $27000, Net cash flow = $21500
- Year 3: Operating cost = $5000, Benefit = $27000, Net cash flow = $22000
Calculate discounted cash flows by multiplying net cash flow by the discount factor. Add the discounted cash flows to get NPV.
To calculate ROI, subtract the investment from the gains, divide by investment, and multiply by 100. The payback period is the time it takes for cumulative discounted benefits to exceed the costs.