IS 401 App C

Question 1

Net Present Value

Answer 1

The two basic concepts of the NPV are

1. that all benefits and costs are calculated in terms of today’s dollars (that is, present value)
2. that benefits and costs are combined to give a net value

Question 2

discount rate

Answer 2

the annual percentage rate that an amount of money is discounted to bring it to a present value

Question 3

discount factor

Answer 3

the accumulation of yearly discounts based on the discount rate

Question 4

NPV Equation

Answer 4

Combine the benefits and cost (net them together) and then apply the discount factor

OR

You can apply the discount factor to the benefits and costs individually and then combine the two discounted amounts

Question 5

Payback

Answer 5

is a method to determine the point in time at which the initial investment is paid off

Question 6

Payback Caluclation

Answer 6

Calculate the ratio of the negative value at the beginning of the year to the total amount of benefit derived during the year then apply this ratio to the number of days in a year to determine the number of days until breakeven.

Question 7

Return on Investment (ROI)

Answer 7

objective: calculate a percentage return (like an interest rate) on the initial investment

Question 8

ROI Calculations

Answer 8

Can be done using values that include the discount factor

other times, it can be done on a cash basis without considering the organization’s assigned discount rate