Final answer:
To draw the cashflow diagram for implementing RFID technology with a savings of $1.5 million per month, begin with a large initial outflow followed by regular inflows starting from the 3rd month for a period of 2½ years. The present value of these inflows, calculated at a 12% annual interest rate compounded monthly, would indicate how much could be spent on the technology.
Step-by-step explanation:
To determine how much your company could afford to spend on implementing RFID technology, given a savings of $1.5 million per month beginning 3 months from now at an interest rate of 12% per year compounded monthly, and with a recovery period of 2½ years, you would use the present value of an annuity calculation. The cash flow starts as an outflow (the cost of the investment) followed by inflows (savings from the investment). The cashflow diagram would start with a single large outflow followed by a series of inflows starting from month 3.
Here is a step-by-step approach:
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- Determine the periodic interest rate by dividing the annual rate by the number of periods per year. (12% annual interest rate divided by 12 months = 1% monthly interest rate).
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- Calculate the present value of the savings received for 2½ years. (This is 30 months since 1 year is assumed to be 12 months).
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- Account for the fact that savings begin 3 months from now, not immediately.
Using financial formulas or a financial calculator, you can find out the maximum initial investment that would result in the present value of the expected savings over the given period equals that investment.
However, to draw an exact cashflow diagram, specific financial figures must be calculated first.