Chapter 4, Problem 21PE

Program Plan Intro

Economic feasibility analysis of an information system:

Monetary benefits of an information system = $85,000 per year.

One-time costs = $75,000

Recurring cost = $35,000 per year.

Discount rate = 12%

Time period = 3 years

Explanation of Solution

Overall Return on Investment (ROI):

Overall return on investment can be calculated as:

$\text{Overall ROI = }\left(\text{Overall NPV / NPV of all costs}\right)$

$\begin{array}{l}\text{Overall NPV = }\left(\text{NPV of all benefits – NPV of all costs}\right)\hfill \\ \hfill \end{array}$

Explanation of Solution

Break-Even Analysis (BEA):

• Break even analysis is carried out by determining NPV of yearly cash flows.
• The yearly cash flows are calculated by subtracting present values of recurring costs from the present value of yearly benefits.
• The overall NPV cash flow is total cash flow of the preceding years.
• After determining NPV yearly cash flows, it is found that break even occurs between year one and two.
• This is because Overall NPV is non-negative (positive)...