Chapter 4, Problem 24PE

Program Plan Intro

Economic feasibility analysis of an information system:

Monetary benefits of an information system = ($40,000 for year 1), ($50,000 for year 2), ($60,000 for year 3), ($70,000 for year 4), ($80,000 for year 5), ($90,000 for year 6).

One-time costs = $80,000

Recurring cost = $40,000 per year.

Discount rate = 11%

Time period = 6 years

Explanation of Solution

Overall Return on Investment (ROI):

Overall return on investment can be calculated as:

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

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

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...