Problem: A firm’s information systems department receives many requests for proposed projects to improve the system. Each project proposal is processed, using the proposing department’s estimate of benefits and the information systems departments’ estimate of project costs. The costs are incurred within three months of project adoption (and are treated as occurring at the present). Estimated benefits are calculated as of the end of 12 months, 24 months, and 36 months after project completions. Company policy is to disregard and benefits beyond 36 months as technology will probably outdate systems by that time. The company uses a discount rate of 12% per year. Calculate net present values of the following eight proposed projects and explain how this information would most likely be used.
|
Department
|
Cost
|
Benefits@12 MO.
|
Benefits@24 MO.
|
Benefits@36 MO.
|
|
Production
|
$300,000
|
$100,000
|
$120,000
|
$150,000
|
|
Production
|
$260,000
|
$150,000
|
$200,000
|
$0
|
|
Marketing
|
$220,000
|
$150,000
|
$200,000
|
$300,000
|
|
Marketing
|
$520,000
|
$250,000
|
$240,000
|
$220,000
|
|
Marketing
|
$360,000
|
$200,000
|
$180,000
|
$150,000
|
|
Transport
|
$360,000
|
$200,000
|
$200,000
|
$200,000
|
|
Admin.
|
$580,000
|
$0
|
$500,000
|
$400,000
|