I need to identify the ROI and NPV of the wireless order-tracking system.
Here is the information it gives me:
- The aquisition cost is $35,000 paid at the time of installation.
- It reduces the wait staff by one person: Figure $10 per hour, or 2020 hours per year + 18%
benefits
- Money costs are 7%
- The system may become obsolete in three years
To calculate the ROI (Return on Investment) and NPV (Net Present Value) of the wireless order-tracking system, we need to take into account several factors, including the initial cost, annual savings, discount rate, and the system's lifespan.
1. Calculate the savings per year:
- The system reduces the wait staff by one person, which results in savings on wages and benefits.
- $10 per hour * 2020 hours per year = $20,200 per year (wages)
- Benefits: 18% of $20,200 = $3,636 per year (benefits)
- Total annual savings = $20,200 + $3,636 = $23,836
2. Determine the lifespan of the system:
- The given information states that the system may become obsolete in three years.
3. Calculate ROI:
ROI measures the profitability of an investment relative to the amount of money invested.
- ROI = (Net Profit / Cost of Investment) * 100
- Net Profit = Total Savings - Cost of Investment
- Cost of Investment = $35,000
- Total Savings after three years = $23,836 * 3 = $71,508
- Net Profit = $71,508 - $35,000 = $36,508
- ROI = ($36,508 / $35,000) * 100
4. Calculate NPV:
NPV determines the value of an investment in today's dollars, considering the time value of money.
- NPV = Σ (Cash Flow / (1 + Discount Rate)^t)
- Cash Flow = Savings for each year / (1 + Discount Rate)^t
- Discount Rate = 7% (given in the information)
- t = years (1, 2, 3)
Now, let's calculate the NPV:
For year 1:
- Cash Flow = $23,836 / (1 + 0.07)^1 = $23,836 / 1.07
For year 2:
- Cash Flow = $23,836 / (1 + 0.07)^2 = $23,836 / 1.1449
For year 3:
- Cash Flow = $23,836 / (1 + 0.07)^3 = $23,836 / 1.225043
- NPV = ($23,836 / 1.07) + ($23,836 / 1.1449) + ($23,836 / 1.225043) - $35,000
After calculating the NPV, we can determine if the investment is financially viable. If the NPV is positive, the investment is considered profitable. If it's negative, the investment may not be beneficial.
Perform the above calculations using the given figures to find the ROI and NPV of the wireless order-tracking system.