Chapter 4, Problem 33CP

a.

Explanation of Solution

Project initiation and focus for the new system:

• The initiation for the project is done by a group of business people, high level managers, and committees of organization and so on.
• All these people help to complete the project in an efficient manner.
• There are three main focuses for the development of a new information system as follows:
  • People who are involved in the project such as team members or high...

b.

Explanation of Solution

Modified economic feasibility analysis for customer tracking system:

Monetary benefits of an information system = $50,000 per year.

One-time costs = $47,500

Recurring cost = $32,000 per year.

Discount rate = 10%

Time period = 5 years

Present value for benefits and costs can be calculated by using the formula:

  ${\text{PV}}_{\text{n}}\text{= Y × 1/}{\left(\text{1+i}\right)}^{\text{n}}$

Here, PV_n is the present value and i is the discount rate.

Present value (PV) calculation for benefits:

Benefits starts from year 1, hence calculation of present value starts from year 1.

${\text{PV}}_{\text{0}}\text{= 0 }\times \text{ 1 / }{\left(\text{1+ 0}\text{.10}\right)}^{\text{0}}\text{= 0}\times \text{1 = 0}$

${\text{PV}}_{\text{1}}\text{= 50,000 × 1/ }{\left(\text{1+}\text{.10}\right)}^{\text{1}}\text{= 50,000×0}\text{.909 = 45,450}$

${\text{PV}}_{\text{2}}\text{= 50,000 × 1/ }{\left(\text{1+}\text{.10}\right)}^{\text{2}}\text{= 50,000×0}\text{.8264 = 41,320}$

${\text{PV}}_{\text{3}}\text{= 50,000×1/ }{\left(\text{1+}\text{.10}\right)}^{\text{3}}\text{= 50,000×0}\text{.7513= 37,565}$

${\text{PV}}_{\text{4}}\text{= 50,000×1/ }{\left(\text{1+}\text{.10}\right)}^{\text{4}}\text{= 50,000×0}\text{.683 = 34,150}$

${\text{PV}}_{\text{5}}\text{= 50,000×1/ }{\left(\text{1+}\text{.10}\right)}^{\text{5}}\text{= 50,000×0}\text{.6209 = 31,045}$

Net Present Value (NPV) for benefits:

 $\begin{array}{l}NPV=P{V}_0+P{V}_1+P{V}_2+P{V}_3+P{V}_4+P{V}_5\hfill \\ {}_{ }=0+45,450+41,320+37,565+34,150+31,045\hfill \\ =189,530\hfill \end{array}$

Present Value (PV) for costs:

${\text{PV}}_{\text{0}}\text{= 47,500×1/ }{\left(\text{1+}\text{.10}\right)}^{\text{0}}\text{= 47,500×1 = 47,500}$

${\text{PV}}_{\text{1}}\text{= 32,000×1/ }{(\text{1+}}^{}$

c.

Explanation of Solution

Modified Economic Feasibility Analysis for Customer Tracking System at discount rate(12%):

Monetary benefits of an information system = $50,000 per year.

One-time costs = $47,500

Recurring cost = $32,000 per year.

Discount rate = 12%

Time period = 5 years

Present value for benefits and costs can be calculated by using the formula:

  ${\text{PV}}_{\text{n}}\text{= Y × 1/}{\left(\text{1+i}\right)}^{\text{n}}$

Here PV_n is the present value and i is the discount rate.

Present value (PV) calculation for benefits:

Benefits starts from year 1, hence calculation of present value starts from year 1.

${\text{PV}}_{\text{0}}\text{= 0 }\times \text{ 1 / }{\left(\text{1+0}\text{.12}\right)}^{\text{0}}\text{= 0}\times \text{1 = 0}$

 ${\text{PV}}_{\text{1}}\text{= 50,000 × 1/ }{\left(\text{1+}\text{.12}\right)}^{\text{1}}\text{= 50,000×0}\text{.8929 = 44,645}$

${\text{PV}}_{\text{2}}\text{= 50,000 × 1/ }{\left(\text{1+}\text{.12}\right)}^{\text{2}}\text{= 50,000×0}\text{.7972 = 39,860}$

$P{V}_3=\text{ 50},000\times 1/{\left(1+.12\right)}^3=\text{ 50},000\times 0.7118=\text{ 35,590}$

${\text{PV}}_{\text{4}}\text{= 50,000×1/ }{\left(\text{1+}\text{.12}\right)}^{\text{4}}\text{= 50,000×0}\text{.6355 = 31,775}$

${\text{PV}}_{\text{5}}\text{= 50,000×1/ }{\left(\text{1+}\text{.12}\right)}^{\text{5}}\text{= 50,000×0}\text{.5674 = 28,370}$

Net Present Value (NPV) for benefits:

$\begin{array}{l}NPV=P{V}_0+P{V}_1+P{V}_2+P{V}_3+P{V}_4+P{V}_5\hfill \\ {}_{ }=0+\text{ 44,645 + 39,860 + 35,590 + 31,775 + 28,370}\hfill \\ =\text{ 180,240}\hfill \end{array}$

Present Value (PV) for costs:

${\text{PV}}_{\text{0}}\text{= 47,500×1/ }{\left(\text{1+}\text{.12}\right)}^{\text{0}}\text{= 47,500×1 = 47,500}$

${\text{PV}}_{\text{1}}\text{= 32,000×1/ }{\left(\text{1+}\text{.12}\right)}^{\text{1}}\text{= 32,000×0}\text{.8929 = 28,572}$

${\text{PV}}_{\text{2}}\text{= 32,000×1/ }{\left(\text{1+}\text{.12}\right)}^{\text{2}}\text{= 32,000×0}\text{.7972 = 25,510}$

$P{V}_3=\text{ 32},000\times 1/{\left(1+.12\right)}^3=\text{ 32},000\times 0.7118=\text{ 22,777}$

${\text{PV}}_{\text{4}}\text{= 32,000×1/ }{\left(\text{1+}\text{.12}\right)}^{\text{4}}\text{= 32,000×0}\text{.6355 = 20,336}$

${\text{PV}}_{\text{5}}\text{= 32,000×1/ }{\left(\text{1+}\text{.12}\right)}^{\text{5}}\text{= 32,000×0}\text{.5674 = 18,156}$

Net Present Value (NPV) for costs:

$\begin{array}{l}NPV=P{V}_0+P{V}_1+P{V}_2+P{V}_3+P{V}_4+P{V}_5\hfill \\ =\text{ 47,500 + 28,572 + 25,510 + 22,777 + 20,336 + 18,156}\hfill \\ =\text{ 162,853}\hfill \end{array}$

Overall Return on Investment (ROI):

Overall return on investment can be calculated as:

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

$\begin{array}{l}\text{Overall NPV = }\left(\text{NPV of all benefits – NPV of all costs}\right)\hfill \\ \text{ = 180,240 – 162,853}\hfill \\ \text{ = 17,386}\hfill \end{array}$

$\begin{array}{l}\text{Overall ROI = 17,386 / 162,853}\hfill \\ \text{ = 0}\text{.1}\hfill \end{array}$

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 years three and four

d.

Explanation of Solution

Online stores that sell business furniture:

• Two online stores that sell business furniture are “Furniture world” and “Style Spa”.
• These online stores consist of a website which has all the furniture’s that are available in the store...