Perform a financial analysis for a project using the format provided in Figure 4-3. Assume the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $100,000 in Year 1 and $25,000 each year in Years 2, 3 and 4. Use an 8% discount rate. Create a spreadsheet (or use the business case financials template provided on the companion Web site) to calculate and clearly display the NPV, ROI and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project based on your financial analysis
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Based on the results of the financial analysis for this project we can see that NPV (an indicator of how much value an investment or project adds to the value of the company*1) = $41,740, ROI (the ratio of money gained or lost on an investment relative to the amount of money invested*2) = 25% and payback occurs in the third year. While both the NPV and ROI indicate that the project will have a positive financial impact, the fact that the payback will not occur until the third year means that the company will need to wait a long period of time before the benefits of the project are realised. Based upon the payback period I would recommend that other projects be sought unless this was one of major importance to the company for non-financial reasons ie; compliance with new legislation, etc.
*1 Net present value. In Wikipedia [Web]. Retrieved September 3, 2007, from http://en.wikipedia.org/wiki/Net_present_value
*2 Rate of return. In Wikipedia [Web]. Retrieved September 3, 2007, from http://en.wikipedia.org/wiki/Rate_of_return_on_investment