A. Review Questions (one, two or three paragraphs each)
- How do you know if a project is economically feasible? Why is TCO important?
- Describe each cost classification and include two examples.
- What are four chargeback methods? In your view, is one more â€œfairâ€ than another?
- Describe each benefit classification, and include two examples.
- What formula do you use to calculate the payback period?
- What formula do you use to calculate ROI?
- Would the formulas in questions 5 and 6 also apply to heavy equipment, such as a bulldozer? Why or why not?
- Define the term present value, and provide an example.
- What is the meaning of the phrase, time value of money?
- Why is it difficult to assign a dollar figure to an intangible cost? Can it ever be done? Explain your answer, and provide an example.
B. Discussion Topics (two, three or four paragraphs each)
- Suppose your supervisor asks you to inflate the benefit figures for an IT proposal in order to raise the priority of his or her favorite project. Would this be ethical? Does internal cost-benefit analysis affect company shareholders? Why or why not?
- In this Toolkit Part, you learned how to use payback analysis, ROI, and NPV to assess IT projects. Could these tools also be used in your personal life? Give an example of how you might use each one to help you make a financial decision.
- Is there a role for intuition in the decision-making process, or should all judgments be made strictly on the numbers? Explain your answer.
- The time value of money can be an important factor when analyzing a projectâ€™s NPV. Is the time value of money just as important in periods of low inflation as it is in periods of high inflation? Explain your answer.
C. Projects (you must show your work)
HINT: Document your results via spreadsheet for copy & pasting or uploading.
- Suppose you are studying two hardware lease proposals. Option 1 costs $4,000, but requires that the entire amount be paid in advance. Option 2 costs $5,000, but the payments can be made $1,000 now and $1,000 per year for the next four years. If you do an NPV analysis assuming a 14% discount rate, which proposal is less expensive? What happens if you use an 8% rate?
- Assume the following facts:
- A project will cost $45,000 to develop.
- When the system becomes operational after a one-year development period, operational costs will be $9,000 during each year of the systemâ€™s five-year useful life.
- The system will produce benefits of $30,000 in the first year of operation, and this figure will increase by a compound 10% each year.
What is the payback period for this project?
- Using the same facts as in Project 2, what is the ROI for this project?
- Using the same facts as in Project 2, what is the NPV for this project?