Podcast
Questions and Answers
The old system that will be replaced has a book value of ____.
The old system that will be replaced has a book value of ____.
100000
What is the development cost of the new system?
What is the development cost of the new system?
700000
What is the residual value of the new system after the project?
What is the residual value of the new system after the project?
100000
What is the reduction in labor cost per year expected from the new system?
What is the reduction in labor cost per year expected from the new system?
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What is the increase in utility costs per year as a result of the new system?
What is the increase in utility costs per year as a result of the new system?
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What is the recommended rate of return (RRR) for this project?
What is the recommended rate of return (RRR) for this project?
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On financial grounds, would you recommend the project?
On financial grounds, would you recommend the project?
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If the development cost is found to be $760,000, does this affect your recommendation to undertake the project?
If the development cost is found to be $760,000, does this affect your recommendation to undertake the project?
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Study Notes
Project Overview
- BigFirm Pty Ltd is evaluating an IT project intended to enhance service staff efficiency.
- The existing system has a book value of $100,000 and a present resale value of $70,000.
Financial Data for New System
- Development cost estimated at $700,000.
- Implementation cost projected at $400,000.
- Expected residual value of the new system at $100,000.
- Reduction in labor costs per year expected to be $180,000.
- Anticipated increase in utility costs per year of $10,000.
Financial Metrics
- Required rate of return (RRR) is set at 14%.
- Economic life of the project is projected at 10 years.
Cash Flow Analysis
- Year 0 initially shows the net cash flow of selling the old system and incurring development and implementation costs.
- Annual cash inflows include reduced labor costs adjusted for increased utility expenses.
- Final year cash flow includes the residual value of the new system.
Net Present Value (NPV) Calculation
- NPV calculation will involve discounting future cash flows at the cost of capital (14%).
- Positive NPV indicates project viability; negative NPV suggests it should not be undertaken.
Potential Errors in Data
- Project manager reports errors in cost calculations:
- Development cost revised to $760,000.
- Reduction in labor costs adjusted to $230,000.
- Reevaluation of cash inflows and NPV is necessary after these adjustments.
Decision Factors
- Original recommendation based on initial cash flow calculations; the recommendation may change due to revised costs.
- Positive NPV indicates support for the project; a negative NPV suggests declining the proposal.
Conclusion
- Final evaluation will compare old and new cash flow models to determine the financial feasibility of the project.
- The decision hinges on accurate data and effective financial forecasting.
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Description
This quiz focuses on evaluating the financial aspects of an IT project undertaken by BigFirm Pty Ltd. Participants will assess costs, savings, and the return on investment using the given data on the old and new systems. It's designed to enhance understanding of project feasibility and economic evaluations.
