Suppose that you have a chance to buy some new computer equipment and software that will add to your future profits. It will take a year to have the package designed to your needs, installed, tested and your personnel trained to use it. After that, it will add to your profits for the following 5 years until you expect to change your hardware over again. The project is expected to make you:
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Year
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Year 6
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Increase in Profits
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0.00
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1,000,000
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2,000,000
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2,000,000
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1,000,000
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1,000,000
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Present Value
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|
|
|
|
|
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Notice that the project will increase your profits a total of $7 million dollars, BUT that benefit is spread over a 6 year period while the cost is paid now. Find the present value for each year if the interest rate is 6% and then add them together for the total present value of future revenue.
Total PV = ?
If the price of the software is $5 million is it profitable to buy the software?