Economic Feasibility Analysis of Information Systems (IS) Projects
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Economic Feasibility Analysis of Information Systems (IS) Projects
Economic Feasibility Analysis of Information Systems (IS) Projects
Assume that you are assigned to assess the economic feasibility of a project on developing information systems (IS) for a company. The development of the information systems results in increase in sales of three products that the company manufactures.
However, the development of the IS application involves development costs (such as, labor, training, software, and hardware) which is incurred at the beginning of the project. The project also involves annual operating costs (such as, salaries, software licenses, and hardware upgrades). The estimated benefits and costs of the IS project are presented in table 1.
Use Microsoft Excel to analyze the economic feasibility of the IS project. The layout of the spread sheet is shown in figure 1. Please consider the time value of money and assume an interest rate of 10% on investment. Using a 5-year horizon, calculate the net present value of the costs and benefits. Also calculate the overall return on investment (ROI) and the break-even point of the IS project. The formulae to calculate net present values, ROI, and the break-even point are presented in table 2.
Table 1 – Estimated Benefits and Costs of the Project
2013 2014 2015 2016 2017 Benefits Increased sales from Product 1 $ 20000 $ 22500 $ 24500 S 25500 Increased sales from Product 2 $ 35000 $ 36000 $ 47500 $ 40500 Increased sales from Product 3 $ 45000 $ 56500 $ 48000 $ 51000 Development Costs (one-time) Labor $ 40000 Training $ 20000 Software $ 22000 Hardware $ 20000 Operating Costs (Recurring Costs) Salaries $ 35000 $ 45750 $ 56500 $ 62250 Software Licenses $ 7000 $ 6000 $ 5000 $ 4500 Hardware Upgrades $ 7000 $ 6250 $ 5500 $ 4700
Table 2 – Formulae Used in the Worksheet
Total benefit Sum of increased sales from products 1, 2, and 3 Discount rate 1/(1+Interest rate)n Where n=number of years in future
Present value of benefits =Total benefit * Discount Rate Total Development cost Labor cost + Training cost + Software cost + Hardware cost Total Operating Costs Salaries + Software Licenses + Hardware Upgrades Total Costs Total Development Cost + Total Operating Cost Present Value of Total Costs Total Costs * Discount Rate Overall Net Present Value (NPV) Present Value of all benefits* – Present Value of all Total Costs* Return on Investment Overall NPV/Present Value of all costs* Break-even Analysis (Yearly NPV Cash Flow) Present Value of benefits for the year – Present value of total costs for the year Break-even Analysis ( Overall NPV Cash Flow) Overall NPV Cash Flow of the previous year + Yearly NPV Cash Flow Break-even Point (Yearly NPV Cash Flow-Overall NPV Cash Flow)/ Yearly NPV Cash Flow. Use the data from the year in which the overall NPV Cash Flow is Positive
*Over the duration of the project
Economic Feasibility Analysis of Information Systems (IS) Projects
RUBRIC
Excellent Quality
95-100%
Introduction 45-41 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Literature Support
91-84 points
The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.
Methodology
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Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score
50-85%
40-38 points
More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.
83-76 points
Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.
52-49 points
Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
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37-1 points
The background and/or significance are missing. No search history information is provided.
75-1 points
Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.
48-1 points
There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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