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.
Please 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.
Table 1 - Estimated Benefits and Costs of the Project
2010 2011 2012 2013 2014
Benefits
Increased sales from Product 1 $ 20000 $ 22500 $ 24500 S 25500
Increased sales from Product 2 $ 15000 $ 16000 $ 17500 $ 19500
Increased sales from Product 3 $ 15000 $ 16500 $ 18000 $ 20000
Development Costs (one-time)
Labor $ 20000
Training $ 5000
Software $ 12000
Hardware $ 10000
Operating Costs (Recurring Costs)
Salaries $ 25000 $ 25750 $ 26500 $ 27250
Software Licenses $ 5000 $ 5000 $ 5000 $ 5000
Hardware Upgrades $ 7000 $ 6250 $ 5500 $ 4750
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