1. **State the problem:** Calculate the return on investment (ROI) for the IS project with initial cost 500,000 and cash flows over 5 years, considering a cost of capital of 7%. 2. **Identify cash flows:** Initial expense at Year 0 is $500,000 (or 500 in 000s). Increased revenue and cost savings start from Year 2. 3. **Calculate net cash flow each year:** - Year 0: -500 (initial expense) - Year 1: 0 (no revenue or savings) - Year 2: 100 + 50 = 150 - Year 3: 150 + 50 = 200 - Year 4: 200 + 50 = 250 - Year 5: 250 + 50 = 300 4. **Ignore depreciation for cash flow calculation** because it is a non-cash expense. 5. **Calculate the Net Present Value (NPV):** $$\text{NPV} = -500 + \frac{0}{(1+0.07)^1} + \frac{150}{(1.07)^2} + \frac{200}{(1.07)^3} + \frac{250}{(1.07)^4} + \frac{300}{(1.07)^5}$$ Calculate each term: $$\frac{150}{1.07^2} = \frac{150}{1.1449} \approx 131.05$$ $$\frac{200}{1.07^3} = \frac{200}{1.225} \approx 163.27$$ $$\frac{250}{1.07^4} = \frac{250}{1.3108} \approx 190.68$$ $$\frac{300}{1.07^5} = \frac{300}{1.4026} \approx 213.98$$ Sum of discounted cash inflows: $$131.05 + 163.27 + 190.68 + 213.98 = 698.98$$ NPV: $$-500 + 0 + 698.98 = 198.98$$ 6. **Calculate ROI:** ROI is the ratio of net gain to initial investment: $$\text{ROI} = \frac{\text{Net Gain}}{\text{Initial Investment}} = \frac{\text{NPV}}{500} = \frac{198.98}{500} = 0.398 \approx 39.8\%$$ **Final answer:** The ROI for the project is approximately 39.8%.