Assume monetary benefits of and information system of $38,000 the first year and

Question

Assume monetary benefits of and information system of $38,000 the first year and increasing benefits in each subsequent year (year 1 = $56,000, year 2 = $65,000, year 3 = $74,000, year 4 = $80,000, year 5). One-time development costs were $65,410 and ongoing costs were $14,200 beginning in year 1 gradually increasing in the subsequent four years as follows: $19,300 in the year 2,$30,100 in the year 3, $38,500 in the year , and $ 47,400 in the year5.The discount rate for the company was 10 percent. Using a five-year time horizon, calculate the net present value of these costs and benefits. Also, calculate the overall return on investment and then present a break-even analysis. At what point does break-even occur?

Explanation / Answer

The most important challenge for this project is new technology unfamiliar to the development team. When the system will use new technology, which is unfamiliar for the analysts and programmers, it increases the risks. Spiral model is specifically designed to reduce project risks. Further, application of new technology as early as possible will improve the chance of success. Throwaway prototyping is particularly appropriate for this situation since it explicitly encourages the developers to develop design prototypes for areas with high risks. It also facilitates user involvement. Phased model is good as well because it creates opportunities to investigate the technology in some depth before the design is complete. 2. Assume monetary benefits of an information system at $38,000 in the first year and increasing benefits in each subsequent year (i.e., $45,000 in the year 2, $56,000 in the year 3, $65,000 in the year 4, $74,000 in the year 5). One-time development cost were $65,410 and ongoing costs of $14,200 beginning in year 1 gradually increasing in the subsequent four years as follows: $19,300 in the year 2, $30,100 in the year 3, $38,500 in the year 4, and $47,400 in the year 5. The discount rate for the company is 10 per cent. Using a five-year horizon, calculate the NPV of these costs

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