Deck 17: Evaluating Ais Investments

Question 1

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

A)IT is a commodity,every firm makes IT investments
B)IT investments require large amounts of capital
C)Capital resources are limited
D)Major IT projects can affect substantial portions of the organization

Answer 1

A

Question 2

Which of the following is not a potential benefit of an IT investment?

A)Revenue enhancement
B)Revenue savings
C)Cost avoidance
D)Revenue protection

Answer 2

B

Question 3

The appropriate cost of capital to use in valuing an IT project is the same regardless of the project riskiness.

Answer 3

False

Question 4

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

Question 5

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

A)Complementary business process changes
B)Potential technological solutions
C)Gaps in performance indicated by the strategy map
D)Project risks

Question 6

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

A)What key business issues does it address?
B)What are the risks of doing the project?
C)How will success be measured?
D)None of the choices are correct.

Question 7

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

Question 8

The value proposition step in the analysis of an IT initiative should focus on five questions,including the timing of expected benefits.

Question 9

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

Question 10

Which of the following is an example of solution risk?

A)The solution is not aligned with the company's strategy.
B)The solution will not generate projected benefits.
C)The solution will be delayed.
D)Employees are unwilling to make the necessary changes.

Question 11

Which of the following is the best approach to mitigate alignment risk?

A)Assure top management support.
B)Conduct training and provide incentives.
C)Use the balanced scorecard framework.
D)Use sensitivity analysis.

Question 12

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

A)Find out what other firms experienced in similar situations
B)Review options with the hardware vendor
C)Consult with experts
D)Use simulation software

Question 13

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

Question 14

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

Question 15

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

Question 16

Benefits are often estimated without complete information.

Question 17

Which of the following is an example of project risk?

A)The technology will not work as expected.
B)The IT project is not aligned with the company's strategy.
C)The financial benefits may not be delivered.
D)The IT project may exceed budget.

Question 18

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

A)End-user data management
B)Ongoing hardware replacement
C)Software upgrades
D)Hardware disposal

Question 19

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

A)Cost of hardware
B)Cost of business disruption
C)Cost of project management
D)Cost of software development

Question 20

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

Question 21

Benefits of IT initiatives should be measured in comparison to which of the following?

A)The amount of information available.
B)Current inputs of the existing IT processes.
C)Revenues and costs that will occur without implementing the initiative.
D)Non-financial aspects of the project.

Question 22

If the implementation costs greatly exceed the expected cost,the firm may have not done an appropriate job assessing which type of risk?

A)Financial Risk.
B)Implementation Risk.
C)Cost Risk.
D)Technological Risk.

Question 23

Which of the following would not help mitigate change risk?

A)Conduct training.
B)Incent employees to learn new system.
C)Reduce employee costs.
D)Communicate changes to employees.

Question 24

Acquisition costs for an IT initiative include all of the following except:

A)Software licenses.
B)Training.
C)Maintenance fees.
D)Project management.

Question 25

Which of the following is not one of the potential approaches to quantifying the expected benefits of IT initiatives?

A)Real option theory.
B)Simulation.
C)External benchmarks.
D)Expert opinion.
E)Performance futures theory.

Question 26

After identifying the relevant risks associated with an IT initiative,which of the following is not something that the project team should consider regarding each risk?

A)The financial impact of the risk scenario occurring.
B)The probability of the risk scenario occurring.
C)The potential benefits of the risk scenario occurring.
D)The cost of mitigating the risk.

Question 27

Which of the following is the order of tasks when evaluating AIS Investments?

A)Develop the Business case→Define Business Requirements→Estimate Benefits→Estimate Costs→Asess Risks→Prepare the value proposition.
B)Develop Financials→Estimate Benefits→Estimate Costs→Asess Risks→Prepare the value proposition.
C)Obtain management support→Estimate Benefits→Estimate Costs→Asess Risks→Prepare the value proposition.
D)Develop the Business case→Define Business Requirements→Estimate Benefits→Estimate Costs→Asess Risks→Implement.

Question 28

When considering the sensitivity of estimates used to evaluate IT initiatives,which of the following are you likely to do?

A)Use multiple metrics to evaluate each IT initiative.
B)Test the impact of changes in assumptions on the various financial metrics.
C)Consider which groups in the organization will benefit.
D)Develop exact quantifications of costs and benefits.

Question 29

Which of the following risks considers the possibility that the new IT system will not be implemented on time or within budget?

A)Solution risk.
B)Change risk.
C)Alignment risk.
D)Project risk.

Question 30

IDC estimates that what percent of IT spending is in the form of capital expenditures?

A)25%.
B)40%.
C)70%.
D)95%.

Question 31

In addition to technology,which of the following is required in order that a firm may achieve desired business process improvements for its IT investment?

A)Other enabling (complementary)changes.
B)Software configuration.
C)The Balanced Scorecard and associated strategy map.
D)Business Intelligence.

Question 32

Which of the following is the formula for payback period?

A)Increased cash flow per period / initial investment.
B)Initial investment / increased cash flow per period.
C)CF_t / (1 + r)^t
D)(Average annual income from IT initiative)/ (Total IT initiative investment cost).

Question 33

For a firm considering AIS and IT initiatives,accountants can play an important role in which of the following ways?

A)Testing business case controls.
B)Memorializing the business case.
C)Developing and reviewing the business case for the initiatives.
D)Entering transactions into the new system.

Question 34

The International Federation of Accountants recommends creating a business case for an IT investment.Which of the following is not a question the business case should answer?

A)What are the alternatives?
B)How will we fund the investment?
C)What are the risks of not doing the project?
D)Why are we doing this project?

Question 35

Which of the following is a key advantage of the Net Present Value metric for evaluating an IT initiative?

A)It relates estimates using accrual accounting.
B)It is easy to calculate.
C)It considers the time value of money.
D)It is sensitive to the discount rate applied.

Question 36

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 yearsRequired:
Compute the payback period and ARR.Advise GPC on their appropriate action.

Question 37

By having a software vendor present a proof of concept,a firm is trying to mitigate which risk?

A)Project Risk.
B)Solution Risk.
C)Feasibility Risk.
D)Technological Risk.

Question 38

Organizations have developed techniques for evaluating IT projects for several reasons.Which of the following is not one of those reasons?

A)Selecting one investment often means forgoing other potentially value-increasing investments.
B)IT projects change regularly.
C)IT projects often require large amounts of capital,and for most firms,capital resources are limited.
D)IT projects often involve changes in business processes that will affect substantial portions of the organization.

Question 39

The economic justification process for a new IT initiative includes all of the following except:

A)Allocate funds for the recommended option.
B)Evaluate potential costs,benefits,and risks for each option.
C)Identify potential solutions.
D)Develop value propositions for each option.
E)Assess the business requirements.

Question 40

Which of the following would not be considered an indirect operating cost for an IT initiative?

A)End user data entry.
B)User self-training.
C)User peer support.
D)End user data management.

Question 41

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 yearsRequired:
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.

Question 42

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?

Question 43

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?