ISACA Certified Information Systems Auditor (CISA) ExamDomain 3: Information Systems Acquisition, Development and ImplementationMedium
An IS auditor is evaluating the business case for a proposed investment in a new customer relationship management (CRM) system. The project has an initial cost of $750,000. It is expected to generate incremental annual cash flows of $200,000 for the next five years. The organization's required rate of return (discount rate) is 10%. What is the Net Present Value (NPV) of this investment?
- A$150,000
- B$88,416
- C$125,000
- D$103,158
Show answer & explanationAnswer & explanation
Correct answer: D. $103,158
The Net Present Value (NPV) is calculated by discounting all future cash flows to their present value and subtracting the initial investment. A positive NPV indicates a profitable investment.
Why the other options are wrong
- A. This calculation is incorrect and overstates the present value of future cash flows.
- B. This calculation is incorrect, likely due to an error in discounting or summing.
- C. This value does not reflect the time value of money, which is critical for NPV calculations.
Net Present Value (NPV)
NPV is a financial metric used to evaluate the profitability of a project or investment, taking into account the time value of money.
- Calculates the present value of future cash flows minus the initial investment.
- A positive NPV indicates a potentially profitable investment.
- Requires a discount rate to account for the opportunity cost of capital.
Memory trick: NPV says 'Now, Profit' for future money.