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a. Compute the net present value of each alternative b. Compute for payback period. Initial Investment = 1,000,000 Payback Period = Initial Investment/Annual Cash Inflow c. Which method do you think provides the best source of information? Why?

a. Compute the net present value of each alternative b. Compute for payback period. Initial Investment = 1,000,000 Payback Period = Initial Investment/Annual Cash Inflow c. Which method do you think provides the best source of information? Why?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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SYSTEMS SELECTION Your company, Kitchen Works, is employing the SDLC for its new information system. The company is currently performing a number of feasibility studies, including the economic feasibility study. A draft of the economic feasibility study has been presented to you for your review. You have been charged with determining whether only escapable costs have been used, the present value of cash flow is accurate, the one-time and recurring costs are correct, realistic useful lives have been used, and the intangible benefits listed in the study are reasonable. Although you are a member of the development team because of your strong accounting background, you have questions about whether some costs are escapable, the interest rates used to perform present value analysis, and the estimated useful lives that have been used. How might you resolve your questions? COST-BENEFIT ANALYSIS Cost of Capital = .14 Design A Design B Project-Completion time 24 months 24 months Expected Useful Life 6 years 6 years One-time Cost 750,000 720,000 Recurring Cost 275,000 295,000 Tangible Benefits | 693,000 675,000 a. Compute the net present value of each alternative b. Compute for payback period. Initial Investment = 1,000,000 Payback Period = Initial Investment/Annual Cash Inflow c. Which method do you think provides the best source of information? Why?
Transcribed Image Text:SYSTEMS SELECTION Your company, Kitchen Works, is employing the SDLC for its new information system. The company is currently performing a number of feasibility studies, including the economic feasibility study. A draft of the economic feasibility study has been presented to you for your review. You have been charged with determining whether only escapable costs have been used, the present value of cash flow is accurate, the one-time and recurring costs are correct, realistic useful lives have been used, and the intangible benefits listed in the study are reasonable. Although you are a member of the development team because of your strong accounting background, you have questions about whether some costs are escapable, the interest rates used to perform present value analysis, and the estimated useful lives that have been used. How might you resolve your questions? COST-BENEFIT ANALYSIS Cost of Capital = .14 Design A Design B Project-Completion time 24 months 24 months Expected Useful Life 6 years 6 years One-time Cost 750,000 720,000 Recurring Cost 275,000 295,000 Tangible Benefits | 693,000 675,000 a. Compute the net present value of each alternative b. Compute for payback period. Initial Investment = 1,000,000 Payback Period = Initial Investment/Annual Cash Inflow c. Which method do you think provides the best source of information? Why?
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