Suppose a district library is considering purchasing a new information system that would give users access to a number of online databases for 5 years. The benefits are estimated to be $100,000 per annum, including both cost savings to the library and user benefits.
The information system costs $325,000 to purchase and set up initially, and $20,000 to operate and maintain each year. After 5 years, the system would be dismantled and sold, resulting in a net cash inflow of $20,000 (terminal value or liquidation value), though the amount can be as low as $10,000 or as high as $25,000. Assume that the discount rate is 6 % and there are no other costs or benefits. You can use MS Excel to help you in calculations. Show your tables/ calculations.
a. Calculate the present value of net benefits for the project using the analysts' predictions.
b. Investigate the sensitivity of the present value of net benefits to alternative predictions on the terminal value of the project.
c. Investigate the sensitivity of the present value of net benefits when discount rate is 3% and when discount rate is 8%.