ROI & NPV: wireless order-tracking system
I need to identify the ROI and NPV of the wireless order-tracking system.
Here is the information I have been given:
- The acquisition 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
PV (present value) of first year salary
=2020*10*1.18
=$23836
PV of second year salary
=23836/1.07
=22276.64
PV of third year salary
=23836/1.07²
=20819.29
NPV (net present value)
= sum of PV - present cost
= 66931.93 -35000
=31931.93
ROI (return of investment)
=(gain-cost)/cost
=31931.93/35000
=91.2%
Check my numbers and definitions.
Identify the ROI and NPV of the wireless order-taking system. ...
To calculate the ROI (Return on Investment) and NPV (Net Present Value) of the wireless order-tracking system, we need to consider the initial cost, the cost savings, and the anticipated benefits over a specific time period.
1. Calculate the Cost Savings:
The system reduces the wait staff by one person, which saves the business $10 per hour. Assuming the business operates 2020 hours per year, the annual cost savings will be:
Cost Savings = $10/hour * 2020 hours = $20,200
2. Calculate the Initial Investment:
The acquisition cost of the system is $35,000 paid at the time of installation.
3. Calculate the Net Annual Benefits:
Net annual benefits are the annual cost savings minus the money costs (interest rate). Given that the money costs are 7%:
Net Annual Benefits = Annual Cost Savings - (Money Costs * Initial Investment)
Net Annual Benefits = $20,200 - (0.07 * $35,000)
4. Calculate the ROI:
ROI is the percentage return on the initial investment. It is calculated using the following formula:
ROI = (Net Annual Benefits / Initial Investment) * 100
5. Calculate NPV:
NPV is a measure of the profitability of an investment, accounting for the time value of money. To calculate NPV, we need to discount the net annual benefits by the interest rate over the investment period.
To calculate NPV, we use the following formula:
NPV = -Initial Investment + (Net Annual Benefits / (1 + Interest Rate)^n)
Where n is the number of years until the system becomes obsolete (three years in this case).
Now, let's calculate the ROI and NPV using the given information:
ROI = ($20,200 / $35,000) * 100
NPV = - $35,000 + ($20,200 / (1 + 0.07)^3)