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Answer

Step 1 > Program Plan Intro

Economic feasibility analysis of an information system:

Monetary benefits of an information system = ($40,000 for year 1), ($50,000 for year 2), ($60,000 for
year 3), ($70,000 for year 4), ($80,000 for year 5), ($90,000 for year 6).

One-time costs = $80,000

Recurring cost = $45,000 per year.

Discount rate = 11%

Time period = 6 years

Step 2 > Program Explanation

Net present value for benefits and costs:

Present value for benefits and costs can be calculated by using the formula:
n
PVn= Y × 1/(1+i)

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.
1
PV1= 40,000 × 1/(1+.11) = 40,000×0.9009 = 36,036

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

3
PV3= 60,000×1/(1+.11) = 60,000×0.7312 = 43,872

4
PV4= 70,000×1/(1+.11) = 70,000×0.6587 = 46,109

5
PV5= 80,000×1/(1+.11) = 80,000×0.5935 = 47,480

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6
PV6= 90,000×1/(1+.11) = 90,000×0.5346 = 48,114

Net Present Value (NPV) for benefits:

NPV = PV1 + PV2 + PV3 + PV4 + PV5 + PV6

= 36,036 + 40,580 + 43,872 + 46,109 + 47,480 + 48,114

= 262,191

Present Value (PV) for costs:

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

1
PV1= 45,000×1/(1+.11) = 45,0000×0.9009 = 40,540

2
PV2= 45,000×1/(1+.11) = 45,000×0.7312 = 36,523

3
P V3 = 45, 000 × 1/(1 + .11) = 45, 000 × 0.7311 = 32,903

4
PV4= 45,000×1/(1+.11) = 45,000×0.6587 = 29,642

5
PV5= 45,000×1/(1+.11) = 45,000×0.5935 = 26,708

6
PV6= 45,000×1/(1+.11) = 45,000×0.5346 = 24,057

Net Present Value (NPV) for costs:

NPV = PV0+ PV1+PV2+ PV3+ PV4+ PV5+ PV6

= 80,000 + 36,523 + 36,522 + 32,903 + 29,642 + 26,708 + 24,057

= 270373

Step 1 > Program Explanation

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 benef its – NPV of all costs)

= 262,191 – 270,373

= -8,182

Overall ROI = 8,182 / 270,373

= 0.03026

Step 1 > Program Explanation

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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 does not occur in all cases.
This is because overall NPV is never positive.

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