Accounting Information Systems Assessment - Excel Spreadsheet

Learning Outcomes

1. Apply technical knowledge and skills in creating information for the workplace using spreadsheets and relational databases.

2. Communicate with IT professionals, stakeholders and user groups of information systems.

Context:

The aim of this assessment is to assess the student's ability to create spreadsheets that can aid business problem solving and analysing results.

The spreadsheet is a powerful tool that has become entrenched in business processes worldwide. A working knowledge of Excel is vital for most office based professionals today.

CASE STUDY

INFORMATION TECHNOLOGY PROPOSAL

Global Athletic Apparel Manufacturer is a manufacturing company. Its external consultant suggested that the company should have an inventory and sales database management system to help the company monitor its sales and products. GAAM's Chief Information Officer, has decided to develop the software in-house.

The project manager has assigned you to do conduct a feasibility study and cost estimates for the software development project. You are also asked to evaluate the cost-benefit analysis for the project.

You need to present the results of your analysis and make recommendations on whether to continue with the development or not.

Cost-Benefit Analysis Overview:

Conducting a Cost-Benefit Analysis

While it is important to provide decision-makers with a range of options, the process of developing and analysing these can be expensive and time consuming. For major investments, it may be necessary to outline various potential options and then to have decision-makers select, after a preliminary screening, a smaller number for detailed appraisal. In any case, an appropriate level of consultation should be undertaken as best practice, either formally or informally, in creating a set of alternatives.

Step 1: Identify, quantify and value the costs and benefits of each alternative

A critical step in the CBA process involves identifying, quantifying and valuing the costs and benefits of each alternative. The types of benefits and costs will depend on the project. To illustrate, consider the construction of a toll motorway to relieve traffic congestion. Relevant costs would include the labour, capital and material costs to construct the road and the value of the land as reflected in the loss of the use of the land for alternative purposes. Benefits of the motorway would include lives saved, reduced travel time (which generally results in fuel and productivity benefits) and possibly the reduction of traffic on alternative routes, including the impact on inlet and outlet roads.

Typical costs of a proposal would include:

• Initial capital costs;
• capital costs of any buildings, equipment, or facilities that need to be replaced during the life of the project;
• operating and maintenance costs over the period of a programme or project; and
• costs which cannot be valued in money terms (often described as 'intangibles').

Typical benefits of a proposal would include:

• benefits which can be valued in money terms, in the form of revenues, cost savings or non-market outputs; and
• benefits which cannot be valued in money terms (also described as 'intangibles').

Estimating the magnitude of costs can be difficult and will normally involve input from accountants, economists and other specialists.

Step 2: Calculate the Net Present Value

In CBA, the net social benefit (NSB), or the excess of total benefit over total cost, is represented by the net present value (NPV) of the proposal.

Before determining the value (or NPV) of a proposal, the costs (C) and benefits (B) need to be quantified for the expected duration of the project. The NSB is calculated by subtracting the cost stream from the benefit stream and is represented as follows:

NSB = B - C

The NPV of a proposal is determined by applying a 'discount rate' (discussed below) to the identified costs and benefits. It is necessary to 'discount' costs and benefits occurring later relative to those occurring sooner. This is because money received now can be invested and converted into a larger future amount and because people generally prefer to receive income now rather than in the future.

Valuing each alternative by calculating NPVs facilitates comparison between proposals that exhibit different timing of their benefits and costs. Programmes with positive NPVs generally indicate an efficient use of the community's resources.

The NPV is calculated as follows:

NPV = ₀∑^t (B_t-C_t)/(1+r)^t

Where:

B_t is the benefit at time y

C_t is the cost at the time t and

r is the discount rate.

Where all projected costs and benefits are valued in real terms, they should be discounted by a real discount rate. This can be estimated approximately by subtracting the expected (or actual) inflation rate from the nominal discount rate. If nominal (current price) values are used for projected costs and benefits, they should be discounted by a nominal discount rate.

The discount rate can also be varied to test the sensitivity of the proposal to changes in this variable and, implicitly, to the phasing of costs and benefits. Sensitivity analysis is discussed in STEP 3 below.

The Internal Rate of Return (IRR) is typically presented as supplementary information to the NPV. The IRR is the discount rate that will result in a NPV of zero. The project's IRR needs to be above the benchmark discount rate for the project to be considered viable (financially or economically, depending on the nature of the analysis).

Step 3: Sensitivity analysis and dealing with uncertainty

The values of future costs and benefits on which the NPV is based are forecasts that cannot be known with certainty. While they should be forecast expected values, it is important to test the NPV for 'optimistic' and 'pessimistic' scenarios. This is achieved by changing the values of key variables in the analysis, such as the discount rate, costs and benefits, and measuring the impact of the changes on the NPV. This is known as sensitivity analysis and is a critical component of any CBA.

Where the NPV is shown to be very sensitive to changes in a variable, the analyst should check on the appropriateness and impact of this variable, and whether any changes to the design of the programme or underlying assumptions are warranted.

Uncertainties, or situations with unknown probabilities, that could have a significant impact on the project outcome should be clearly detailed in the report and, if necessary, monitored during implementation. When dealing with uncertain data, the expected value should be used. The expected value is the weighted sum of the likely outcomes (each outcome having its own probability of occurring). In order to attempt to quantify the likely impact, a probability may be assigned to a particular variable where dealing with uncertain data. These probabilities are then used as weightings in order to derive an expected value.

For example, assume a proposal that has two possible outcomes. The probability of producing an NPV of $5 million is 60% and the probability of producing an NPV of $3 million is 40%. We can now work out the expected NPV (ENPV) as follows:

ENPV = (0.6 x $5m) + (0.4 x $3m) = $4.2m

The expected NPV in this situation is $4.2 million. However, such a single value may not fully convey the uncertainty associated with forecasting the outcome. Hence, it is generally appropriate to present the results as a range that includes the most likely results, as well as results in possible best and worst case scenarios.

Detailed instructions:

1. Create an Excel workbook with the following tabs: development time, costs for in-house development, benefits of in-house development, summary (in-house), payback period (inhouse), comparison and recommendation.

2. Create a development time spreadsheet

a) The expected value of the work time required for a project is calculated as a weighted average of the optimistic (A), most likely (M) and pessimistic (B). For example, expected value E_i is defined as: E_i = (A+4M+B)/6

b) The development time spreadsheet should contain the following data (note you need to format the table and results to make it more professional looking):

3. Create the project team rate spreadsheet

4. Next workbook contains all the costs for in-house development. Your spreadsheet should look like this (note that students are required to input their own cost data except for the project team salary; the project team salary will be based on the total cost from the project team rate spreadsheet. The value for the project team salary starts on the third year and depreciates by 15% per year.

5. Next workbook contains the benefits of in-house development:

6. Create a workbook that contains the summary of the cost-benefit analysis for in-house

7. Create a worksheet that contains the graphs and recommendation.

Attachment:- Assignment File.rar