ROI, NPV and PP

ROI, NPV and PP

• 1.
  ASSALAMU’ALAIKUM INFORMATION TECHNOLOGY MANAGEMENT ROI, NVP, AND PAYBACK PERIOD Return on Investment, Net Present Value and Payback Period Disajikan Oleh : RAHMAD KURNIAWAN P68500
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  Contents 1. ROI 2. NPV 1. NPV on “Chapter 17, Exercises and Project, No.2” 3. Payback Period 2 RAHMAD KURNIAWAN P68500
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  What is ROI? ROIcan be defined as:  One of several approaches to building a financial business case (Solution Matrix).  A performance measure used to evaluate the efficiency of an investment.  A performance measure to compare the efficiency of different investments.  ROI is a metric that yields some insights into how to improve business results in the future (L. Dombrowski) 3 RAHMAD KURNIAWAN P68500
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  Cont...  Another traditionaltool for evalating capital investments is return on investment (ROI), which measures the effectiveness of management in generating profits with its available assets. (Turban)  The ROI measure is a percentage, and the higher this percentage return, the better.  It is calculated essentially by dividing net income attributable to a project by the average assets invested in the project. 4 RAHMAD KURNIAWAN P68500
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  Simple ROI The benefit(return) of an investment is divided by the cost of the investments. The result is expressed as a percentage or a ratio. This is referred to as “simple ROI”. ROI= Gains from investment – Cost of investment Cost of Investment $700,000 - $500,000 = 40% $500,000 5 RAHMAD KURNIAWAN P68500
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  Example of ROI Forexample, a $1000 investment that earns $50 in interest obviously generates more cash than a $100 investment that earns $20 interest, but the $100 investment earns a higher return. So... 6 RAHMAD KURNIAWAN P68500
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  Cont... $1050 $1000 $50 ROI $50 / 1000 5% $1000 $1000 $120 $100 $20 ROI $20 / 100 20% $100 $100 7 RAHMAD KURNIAWAN P68500
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  What is NPV? NPVcan be defined as:  NPV is one of Capital budgeting analysis uses standard financial models. (Turban)  Net present value is the present value of net cash inflows generated by a project including salvage value, if any, less the initial investment on the project. If NPV > 0, accept If NPV < 0, reject 8 RAHMAD KURNIAWAN P68500
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  Cont... Organizations often usenet present value (NPV) calculations for cost benefit analyses. In an NPV analysis, analysts convert future values of benefits to their present-value equivalent by discounting them at the organization’s cost of funds. 9 RAHMAD KURNIAWAN P68500
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  NPV Formula C1 C2 CT NPV C0  (1 r )1 (1 r ) 2 (1 r ) T  Where,  r is the target rate of return per period;  C0 is the Initial investment.  C1 is the net cash inflow during the first period;  C2 is the net cash inflow during the second period;  C3 is the net cash inflow during the third period, and so on ... 10 RAHMAD KURNIAWAN P68500
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  Example of NPV Thereis an opportunity to invest in a business that will pay $200,000 in one year, $400,000 in two years, $600,000 in three years and $800,000 in four years. It can earn 12% per year compounded annually on a mutual fund that has similar risk. If it costs $1.2 million to start this business, should be invest? So... 11 RAHMAD KURNIAWAN P68500
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  Cont... 0 1 2 3 4 years | | | | | | | | | | CF –$1.2 mil $200,000 $400,000 $600,000 $800,000  Discount rate = 12% C1 C2 CT NPV C0  (1 r )1 (1 r ) 2 (1 r ) T 200,000 400,000 600,000 800,000 NPV 1,200,000 (1.12)1 (1.12) 2 (1.12) 3 (1.12) 4 = $232,932 12 RAHMAD KURNIAWAN P68500
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  Resources of databased on exercisesNo. 2 Investing $ 15.000.000 Revenue year 1 $ 4.000.000 Cost, Year 1 $ 2.000.000 Revenue, year 2 $ 5.000.000 Cost, Year 2 $ 2.000.000 Revenue, year 3 $ 5.000.000 Cost, Year 3 $ 1.500.000 Revenue, year 4 $ 5.000.000 Cost, Year 4 $ 1.500.000 Revenue year 5 $ 5.000.000 Cost, Year 5 $ 1.500.000 Total $ 24.000.000 Total $ 23.500.000 Interest rate 10% Assumed first year include investment and cash flow year 1 $ (13.000.000) cost cash flow year 2 $ 3.000.000 cash flow year 3 $ 3.500.000 cash flow year 4 $ 3.500.000 cash flow year 5 $ 3.500.000 NPV= $ (2.145.469,45) 13 RAHMAD KURNIAWAN P68500
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  What is PaybackPeriod? Payback Period can be defined as:  Number of years needed to recover the initial cash outlay of a project Computation  Estimate the cash flows  Subtract the future cash flows from the initial cost until the initial investment has been recovered Decision Rule – Accept if the payback period is less than some preset limit 14 RAHMAD KURNIAWAN P68500
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  Example of Payback Example: Project with an initial cash outlay of $10,000 Free Cash Flows of $2,500 per year for 6 years  Year Cash Flow Balance $10,000 1 $2,500 $7,500 2 $2,500 $5,000 3 $2,500 $2,500 4 $2,500 -------- Payback is 4 years 15 RAHMAD KURNIAWAN P68500
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  References  Turban, McLean,Wetherbe. Information Technology for Management: Transforming Organizations in the Digital Economy (4th edition)  Turban, Volonin, Wood. (2012). Information Technology for Management, 8th edition. John Wiley & Sons (Asia) Pte Ltd.  http://www.cwu.edu/  http://www.passitoncenter.org  http://business.fullerton.edu 16 RAHMAD KURNIAWAN P68500
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  Thank you 17 RAHMAD KURNIAWAN P68500