Management Information Systems Assume you are working as a systems analyst in Co
ID: 423790 • Letter: M
Question
Management Information Systems
Assume you are working as a systems analyst in Company XYZ, and is conducting (along with your team-mates) a cost-benefit analysis for a customer who has hired your organization to design/develop a new information system. While doing this analysis, you estimate that the new system will cost $40,000 to construct (time 0) and will have ongoing maintenance and operational costs of $20,000, $15,000 and $8,000 over three years, respectively. The benefits from the system have been estimated to be $19,500 per year. Your customer estimates that the system will have 3-year useful life and currently has a discount rate of 12%. Calculate the following: (6 points)
You may optionally complete this question using Excel and submit your Excel spreadsheet.
a. What is the total Net Present Value (NPV) of the benefits? (1 points)
b. What is the total Net Present Value (NPV) of the costs? (1 points)
c. What is the total NPV (benefits minus costs)? (1.5 points)
d. When does the project break-even (if ever) (BE SPECIFIC)? (1.5 points)
e. What is the Return of Investment? (1 points)
Explanation / Answer
NPV of Benefits = 19500/(1+0.12) + 19500/(1+0.12)^2 + 19500/(1+0.12)^3 = 46835.71
NPV of Costs = 40000 + 20000/(1+0.12) + 15000/(1+0.12)^2 + 8000/(1+0.12)^3 = 75509.29
Total NPV = NPV of Benefits - NPV of Costs = 46835.71-75509.29 = -28673.58
D) Assuming that the maintenence and operation cost after 3 years stays at 6000 and we continue to reap the same benefit of 19500 every month
Total NPV after 4 months = - 40000 + (19500-20000)/(1+0.12) + (19500-15000)/(1+0.12)^2 + (19500-8000)/(1+0.12)^3 + (19500-6000)/(1+0.12)^4 = -20094.09
Total NPV after 5 months = - 40000 + (19500-20000)/(1+0.12) + (19500-15000)/(1+0.12)^2 + (19500-8000)/(1+0.12)^3 + (19500-6000)/(1+0.12)^4 + (19500-6000)/(1+0.12)^5 = -12433.82
Total NPV after 6 months = - 40000 + (19500-20000)/(1+0.12) + (19500-15000)/(1+0.12)^2 + (19500-8000)/(1+0.12)^3 + (19500-6000)/(1+0.12)^4 + (19500-6000)/(1+0.12)^5 + (19500-6000)/(1+0.12)^6 = -5594.30
Total NPV after 7 months = - 40000 + (19500-20000)/(1+0.12) + (19500-15000)/(1+0.12)^2 + (19500-8000)/(1+0.12)^3 + (19500-6000)/(1+0.12)^4 + (19500-6000)/(1+0.12)^5 + (19500-6000)/(1+0.12)^6 + (19500-6000)/(1+0.12)^7 = 512.41
Therefore as per our assumption the project will reach break even after 7 months
Rate of Investment = (Total Benefit - Total Investment)/(Total Investment) = (19500+19500+19500-40000-20000-15000-8000)/(40000+20000+15000+8000) = -29.52% or (29.52)%
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