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?
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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
separate solution please for a and b. Thank you
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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