1. How will discount rates of 8, 10, 12, 14, and 16 percent affect the project’s feasibility?
Figures 6 – 10 provide suggested answers for this question. The answers for this question assume a useful life of 5 years. Using a discount rate of 8 percent, the net present value of all benefits is $1,732,836.16; the net present value of all costs is $1,640,384.79; the overall net present value is $92,451.36, and the project breaks even in approximately 3.84 years.
Using a 10 percent discount rate, the net present value of all benefits is $1,645,201.46; the net present value of all costs is $1,576,173.19; the overall net present value is $69,028.27, and the project breaks even in approximately 4.04 years.
Using a 12 percent discount rate,…show more content… Hopefully, your students will suggest that additional factors should be considered. These factors include scheduling, strategic alignment, operational objectives, government regulations, and potential benefits. If we base our decision solely on the information from the table, it appears that the custom order tracking system has the second highest IRR. (See Figure 13 for the IRR value.)
Test Your Design Solutions
The Test Your Design section requires students to modify their worksheet design and then use the modified worksheet to provide Ms. Pablo with answers. Suggested answers for the Test Your Design questions are provided below.
1. What recommendations would you make if the useful life of the project is three years instead of five years? Six years? (Use the original case values and assume a discount rate of 14 percent.)
Figure 14 shows the modified Economic Feasibility Summary worksheet. Using a 14 percent discount rate, it appears that the project breaks even in approximately 4.54 years. At first glance, the students may recommend that the project is not feasible, if its useful life is only three years. As the project is in its planning phase, the project team has not identified all benefits and costs. Arguably, this project is still viable, especially if the team emphasizes the custom order tracking system’s intangible benefits, such as customer service and employee morale.
In terms of six years, the net present value of all benefits is