Chapter4-exercise3

Perform a financial analysis for a project using the format provided in Figure 4-3. Assume the projected costs and benefits for this project are spread over four years as follows: Estimated costs are $100,000 in Year 1 and $25,000 each year in Year 2, 3, and 4. Estimated benefits are $0 in Year 1 and $80,000 each year in Year 2, 3, and 4. Use an 8 percent discount rate. Create a spreadsheet (or use the business case financials template provided on the companion Web site) to calculate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial analysis.

Understanding the economic climate and rapid pace of change in businesses and technologies, top management usually have certain recommendations for the length of the payback period of an project investment or appeal to focus on delivering positive financial result quickly while they create a project plan, then they might require all information technology projects to have a payback period of less than two years or even one year, regardless of the estimated NPV or ROI (Schwalbe, 2006). However, because sometimes many crucial projects cannot achieve a payback so quickly or reap a profit in a short time period, that is top management worries and don’t want to continue investing the project, therefore, the organization must also consider positive long-range goals when making technology investments (Schwalbe, 2006). Consequently, according to this financial analysis results as shown in Table 1 financial analysis and Figure 2 charting the payback period, the estimated NPV=41,740, ROI=25% and the cumulative benefits in payback chart is going to have positive number in fourth year. Even though this project needs three years more than two years to get benefits, but I would recommend investing in this project based on this financial analysis, because its calculated cash flow is positive growth.

Table 1. Financial analysis.

Figure 2. Charting the Payback period.

References

1. Schwalbe, K (2006), Information technology project management (4^th ed.). Sydney: Thomson Course Technology.