Deck 14: Evaluating AIS Investments

Question 1

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.

Answer 1

B

Question 2

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

Answer 2

B

Question 3

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

Answer 3

False

Question 4

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 5

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 6

Benefits are often estimated without complete information.

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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 above

Question 17

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

Question 18

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

Question 19

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

Question 20

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 21

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

Question 22

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 23

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?

Question 24

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 years
Required: 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 25

Explain why it is easier to assess the costs of an IT project than to assess the benefits.What factors complicate the cost estimates? What factors complicate the benefits estimates? Do the risks associated with the project primarily affect the costs or the benefits? Why?