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Net Present Value

We are developing a new software system for one of our clients. The system has an up-front cost of $75 million (at t = 0). We have forecasted their inventory levels for the next five years as shown below:

Year Inventory
1 $1.0 billion
2 1.2 billion
3 1.6 billion
4 2.0 billion
5 2.2 billion

We forecast that its new software will enable our client to reduce inventory to the following levels:

Year Inventory
1 $0.8 billion
2 1.0 billion
3 1.4 billion
4 1.7 billion
5 1.9 billion

After Year 5, the software will become obsolete, so it will have no further impact on our client's inventory levels. Our client is evaluating this software project as it would any other capital budgeting project. They estimate that the WACC for the software system is 10%.

What would be the estimated NPV (in millions of dollars) of the new software system?

Solution Preview

We are developing a new software system for one of our clients. The system has an up-front cost of $75 million (at t = 0). We have forecasted their inventory levels for the next five years as shown below:

Year Inventory
1 $1.0 billion
2 1.2 billion
3 1.6 billion
4 2.0 billion
5 2.2 billion

We forecast that its new software will enable our client to reduce inventory to the following levels:

Year Inventory
1 $0.8 billion
2 1.0 billion ...

Solution Summary

This solution is comprised of a detailed explanation to answer what would be the estimated NPV (in millions of dollars) of the new software system.

$2.19