In computation, I have assumed the interest rate to be 10%.C1, C2, and C3 represents the savings for year1, year 2 and year three consecutively. Assuming the interest rate is 10% per annum.
Cost=$10,000
C1=$ 3000
C2=$4000
C3=$5000
PV= FV
(1+i) n
Present values for the first year
P
V1= 3000
(1+0.1) 1
3000/1.1=2727.27
Present values for the second year;
P
V2= 4000
1.1 2
4000/1.21
=3305.78
Present values for the third year;
PV3 = 5000
1.1 3
5000/1.331
= $ 3756.57
Total present values for the three years;
PV=PV1+PV2+PV3
=2727.27+3305.78+3756.57
=$ 9789.62
Net present value for the project;
NPV=9789.62-10000=-210.38
Therefore, NPV < 0
The present values for this organization are $ 2727.27 for the first year, $ 3305.78 for the second year and $ 3756.57 for year 3. By adding the three present value figures, the sum is $ 9789.62.The net present value for this project is -210.38. Based on this Net Present value, I will not proceed with this investment. The project’s NPV is negative(less than zero), meaning it is not viable. Generally, sustainable investments have positive net present values. The organization has a high probability of getting profits from such investments and can, therefore, move forward with them. If NPV is equal to zero (NPV=0), the investment is neutral, and no gain or loss is expected from such investments. For a profit making organizations, it is not advisable to continue undertaking such projects. Finally, there are investments with negative NPV like the one in this case (NPV<0).Such investments would result to loss and the organization should not proceed with it. Therefore, I would not continue pursuing this project because it has negative NPV and would result in losses.
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Compare the PV computation with the ROSI computation and explain which one is better
Concerning calculation, NPV is easy to calculate and understand. PV computation is better because it is simple and easy to interpret. ROSI is quite complicated. Even interpreting the figures for ROSI is a bit complicated because one can easily confuse. The NPV shows a possibility of gains from the project because when NPV is positive, definitely one can note that there is likely to be a profit. ROSI, on the other hand, does not show any possible profits or losses. There are no tangible gains in investment directed at information security. Therefore, using PV is better than ROSI.
