Exam 14: Evaluating AIS Investments

In making the business case for an IT investment,companies should assess the sensitivity of results to the assumptions.

The business case for an IT project does not need to address risk,since risk will be factored into the discount rate.

Benefits are often estimated without complete information.

Cooper Automotive is considering expanding,but to do so,they need to invest in new systems expected to cost $1,000,000.They estimate the salvage value to be $0 at the end of 10 years,so depreciation will be $100,000 per year.They estimate that profits will increase by $250,000 per year.Coop's cost of capital is 10%. Required: Compute the payback period,the accounting rate of return,the net present value,and the internal rate of return.Advise Coop on whether he should invest.Would your advice change if the increase in profits is only $175,000 per year?

Which of the following is not a direct acquisition cost of an IT initiative?

Capital budgeting techniques provide precise estimates on an IT projects costs and benefits.

Explain why it is easier to assess the costs of an IT project than to assess the benefits.What factors complicate the cost estimates? What factors complicate the benefits estimates? Do the risks associated with the project primarily affect the costs or the benefits? Why?

Yellow Duck Brewery is considering two similar technology investments to help track production.Investment (1)has an NPV of $245,000 and a payback period of 3 years.Investment (2)has an NPV of $250,000 and a payback period of 4.25 years.Which investment would you advise them to choose? Why?

Net present value techniques compute the unique rate of return for a particular IT project.

Which of the following is an example of solution risk?

Time that employees devote to self-training on new technology is an example of direct operating costs.

One weakness of the internal rate of return financial metric is that larger projects tend to have higher internal rates of return.

Which of the following is not a reason that large IT projects require economic justification?

Which of the following is not a question that businesses should answer before making major IT investments?

The benefits of an IT project are not necessarily measurable in financial terms.

Which of the following is the least effective approach to quantifying expected benefits of an IT project?

Which of the following is not a major consideration when assessing business requirements for IT initiatives?

Pacific Green Company is considering buying a unique bar-coding machine to help them track their plant inventory.They evaluated the payback period and accounting rate of return and selected the project for further evaluation.Relevant information on the machine is repeated as follows: Acquisition cost = $48,000 Expected salvage value = $0 Expected annual cash inflow benefits = $13,000 per year for 5 years Expected useful life = 5 years Required: Compute the net present value of the project assuming a discount rate of 16%.Use EXCEL to compute the internal rate of return.Advise PGC on the best course of action with respect to the investment.

Pacific Green Company is considering buying a unique bar-coding machine to help them track their plant inventory.They are using the payback period and accounting rate of return methods to evaluate the purchase.They will consider the project further if the payback period is less than four years and it has a minimum accounting rate of return of 7%.Relevant information on the machine is as follows: Acquisition cost = $48,000 Expected salvage value = $0 Expected annual cash inflow benefits = $13,000 per year for 5 years Expected useful life = 5 years Required: Compute the payback period and ARR.Advise GPC on their appropriate action.

Which of the following is not a direct operating cost of an IT initiative?