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Tutorial:Tutorial:Financial FeasibilityFinancial Feasibility

ITEC 2010 “Systems Analysis and Design, I”

[Prof. Peter Khaiter]

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Financial Feasibility (3 groups of Financial Feasibility (3 groups of calculations)calculations)

Present value (PV) Payback period (breakeven point) –

PBP/BEP Return on investment (ROI)

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Present ValuePresent Value

Time value of money “Money tomorrow is cheaper than

money today” In order to total money from different

time periods, a corresponding discount factor must be used

DF(0)=1; DF(1)=0.9091; DF(2)=0.8264;…

years ofnumber - rate;discount - where,

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1)( tDF

DRtDF t

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Present ValuePresent Value

)( x year in receivedAmount tDFtPV

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RMO Cost Benefit AnalysisRMO Cost Benefit AnalysisLine 3 is the product of line 1 and line 2Line 7 is the product of line 5 and line 6

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Payback PeriodPayback Period

Breakeven point is the point in the future, at which benefits become equal to costs.

Line 9 in the Table represents Cumulative NPV of benefits and costs calculated year-by-year from Line 8

The second year in Line 9 shows a deficit of $4796 whereas the Year 3 ends with a positive value of $951,609

Therefore, the breakeven occurs during Year 2

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Payback PeriodPayback Period

How to calculate the breakeven date precisely?

To express 0.005 in days, 0.005*365≈2 days PBP is 2 years and 2 days (see Line 10 in the Table)

iveNPViveCumulatFirstPositveNPVveCumulatiLastNegati

veNPVveCumulatiLastNegati

veNPVveCumulatiLastNegatiyearsBEP

*2

005.2605,9514796

4796*47962

yearsBEP

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Return on InvestmentReturn on Investment

Shows the percentage return (like an interest rate) over the specified period of time (see Line 11)

tsTotalPVCostsTotalPVCosefitsTotalPVBenROI /

%18.172559,913000,336,1

/559,913000,336,1893,122,6

ROI