Pearson eText for Essentials of Systems Analysis and Design -- Instant Access (Pearson+)
Pearson eText for Essentials of Systems Analysis and Design -- Instant Access (Pearson+)
6th Edition
ISBN: 9780137612420
Author: Joseph Valacich, Joey George
Publisher: PEARSON+
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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:

Overall ROI = (Overall NPV / NPV of all costs)

Overall NPV = (NPV of all benefits – NPV of all costs)                    

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)...

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