Essentials of Systems Analysis and Design (6th Edition)
Essentials of Systems Analysis and Design (6th Edition)
6th Edition
ISBN: 9780133546231
Author: Joseph Valacich, Joey George
Publisher: PEARSON
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Chapter 4, Problem 35CP

a.

Explanation of Solution

Costs and benefits required for implementing Inventory Tracking System at American Labs:

The costs for implementing Inventory Tracking System at American Labs include:

  • One-time costs
    • It is the cost associated with starting phases of a project during project initiation and planning.
  • Recurring costs
    • It is the cost that results from present evolution and use of the proposed system.

The benefits for implementing Inventory Tracking System at American Labs:

  • Tangible benefits
    • These are the benefits that can be estimated properly during the course of the project...

b.

Explanation of Solution

Economic feasibility analysis for implementing inventory tracking system:

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

One-time costs = $80,000

Recurring cost = $25,000 per year.

Discount rate = 10%

Time period = 5 years

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

    PVn= Y × 1/(1+i)n

Here PVn 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.

PV0= 0 × 1 / (1+ 0.10)0= 0×1 = 0

PV1= 50,000 × 1/ (1+.10)1= 50,000×0.909 = 45,450

PV2= 50,000 × 1/ (1+.10)2= 50,000×0.8264 = 41,320

PV3= 50,000×1/ (1+.10)3= 50,000×0.7513= 37,565

PV4= 50,000×1/ (1+.10)4= 50,000×0.683 = 34,150

PV5= 50,000×1/ (1+.10)5= 50,000×0.6209 = 31,045

Net Present Value (NPV) for benefits:

NPV = PV0+ PV1+ PV2+ PV3+ PV4+ PV5            = 0 + 45,450 + 41,320 + 37,565 + 34,150 + 31,045        = 189,530

Present Value (PV) for costs:

PV0= 80,000×1/ (1+.10)0= 80,000×1 = 80,000

PV1= 25,000×1/ (1+

c.

Explanation of Solution

Modified Economic Feasibility Analysis for implementing inventory tracking system at discount rate(11%):

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

One-time costs = $80,000

Recurring cost = $25,000 per year.

Discount rate = 11%

Time period = 5 years

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

  PVn= Y × 1/(1+i)n

Here PVn 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.

PV0= 0 × 1 / (1+0.11)0= 0×1 = 0

 PV1= 50,000 × 1/ (1+.11)1= 50,000×0.9009 = 45,045

PV2= 50,000 × 1/ (1+.11)2= 50,000×0.8116 = 40,580

PV3= 50,000×1/ (1+.11)3= 25,000×0.7311= 36,555

PV4= 50,000×1/ (1+.11)4= 50,000×0.6587 = 32,935

PV5= 50,000×1/ (1+.11)5= 50,000×0.5934 = 29,670

Net Present Value (NPV) for benefits:

 NPV = PV0+ PV1+ PV2+ PV3+ PV4+ PV5            = 0 + 45,045 + 40,580 + 36,555 + 32,935 + 29,670         = 184,785

Present Value (PV) for costs:

PV0= 80,000×1/ (1+.11)0= 80,000×1 = 80,000

PV1= 25,000×1/ (1+.11)1= 25,000×0.9009 = 22,522

PV2= 25,000×1/ (1+.11)2= 25,000×0.8116 = 20,290

PV3= 25,000×1/ (1+.11)3= 25,000×0.7311=18,277

PV4= 25,000×1/ (1+.11)4= 25,000×0.6587 = 16,467

PV5= 25,000×1/ (1+.11)5= 25,000×0.5934 = 14,835

Net Present Value (NPV) for costs:

NPV = PV0+ PV1+PV2+ PV3+ PV4+ PV5           = 80,000 + 22,522 + 20,290 + 18,277 + 16,467 + 14,835           = 172,392

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)                       = 184,785 – 172,392                       = 12,393

Overall ROI = 12,393 / 172,392                   = 0.07

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.
  • This is because here overall NPV is positive.

Modified Economic Feasibility Analysis for implementing inventory tracking system at discount rate (14%):

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

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