I need to find the ROI and NPV of a $35,000 software installation, which will reduce staff of one at $10 per hour +18% benefits. Money cost are 7% and the system will become obsolete in three years.
I have figured the ROI, but am not sure about the 7% money cost. Can you help?
Certainly! To calculate the ROI (Return on Investment) and NPV (Net Present Value) of a software installation, you'll need to consider several factors, including costs, benefits, and the time value of money.
Let's start with calculating the ROI. The ROI measures the profitability or return on an investment relative to its cost.
To calculate the ROI:
1. Determine the net benefit of the software installation. In this case, it's the cost savings from reducing staff. The staff cost savings can be calculated as follows:
Staff cost savings = (hourly rate + benefits) * number of hours
In your case, staff cost savings = ($10 + 18% * $10) * total number of hours saved by the system
2. Calculate the ROI using the following formula:
ROI = (Net benefit / Cost of investment) * 100
In your case, ROI = (Net benefit / $35,000) * 100
Now, let's move on to the NPV. The NPV is used to determine the value of an investment by considering the time value of money. It measures the present value of cash inflows minus the present value of cash outflows.
To calculate the NPV, you need to discount the cash flows using the money cost rate (or interest rate). In your case, the money cost rate is given as 7%.
1. Determine the cash flows associated with the software installation over the three-year period. This includes both the cost savings and the initial investment (in negative).
Cash inflows = Staff cost savings for each year
Cash outflow = Initial investment (negative value)
2. Calculate the present value of each cash flow by dividing it by (1 + Money cost rate)^number of years. For example, the present value of cash inflows for year 1 would be: Cash inflows for year 1 / (1 + 7%)^1
3. Sum up the present value of all cash flows and subtract the initial investment to get the Net Present Value (NPV).
Now, to address your question regarding the 7% money cost, you would use this value as the discount rate when calculating the present value of cash flows for the NPV calculation.
If you need further assistance with the actual calculations, please provide more specific information such as the total number of hours saved by the system each year, along with the duration of benefits and costs beyond the three-year period.