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| Variable | Description |
| Present Value; PV | The amount that must be invested now at a specific interest rate to produce a given future value. |
| Cash Flow; CF | Cash Inflows from the implementation minus the cash outflows. Cash inflows can be represented by the cost savings provided by the system minus the costs. |
| Rate of Return; i | The discounted rate of return is the expected rate of return on an investment over the period. While there are various ways of determining the rate, this paper uses a simple interest rate of 5% as an example. |
| Time Period; t | This is the specific time period in the calculation. Each period will have its own present value calculation that will be summed. |
Assumptions
As with all estimates, certain assumptions must be made in order to provide the values for the variables in the calculation described above. The three variables where assumptions need to be provided are the rate of return, the number of time periods in the life of the implementation and the Cash flows for each period. The rate of return can be defined as the cost of borrowing a sum of money, or the expected return for an investment made. While finance managers often use different methods of varying complexity to calculate the rate of return for the company, this article takes a simpler approach and uses a basic rate of 5% for all calculations. For the number of time periods we will use the number of years in the expected life of the system. Although the expected life of a software implementation could be many years, a conservative standard of 5 years will be applied to all assumptions in this article. Finally, in order to determine the projected cash flow of the implementation cost savings must be determined.
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