Economic Feasibility Analysis of Information Systems (IS) Projects   Assume that you are assigned to assess the economic feasibility of a project…

Economic Feasibility Analysis of Information Systems (IS) Projects


Assume that you are assigned to assess the economic feasibility of a project on developing information systems (IS) for a company.  The development of the information systems results in increase in sales of three products that the company manufactures.  However, the development of the IS application involves development costs (such as, labor, training, software, and hardware) which is incurred at the beginning of the project.  The project also involves annual operating costs (such as, salaries, software licenses, and hardware upgrades).  The estimated benefits and costs of the IS project are presented in table 1. 

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Use Microsoft Excel to analyze the economic feasibility of the IS project.  The layout of the spread sheet is shown in figure 1.  Please consider the time value of money and assume an interest rate of 10% on investment.  Using a 5-year horizon, calculate the net present value of the costs and benefits.  Also calculate the overall return on investment (ROI) and the break-even point of the IS project.  The formulae to calculate net present values, ROI, and the break-even point are presented in table 2.



Table 1 – Estimated Benefits and Costs of the Project














   Increased sales from Product 1


$ 20000

 $ 22500

 $ 24500

 S 25500

   Increased sales from Product 2


$ 35000

$ 36000

$ 47500

$ 40500

   Increased sales from Product 3


$ 45000

$ 56500

$ 48000

$ 51000







Development Costs (one-time)







$ 40000






$ 20000






$ 22000






$ 20000











Operating Costs (Recurring Costs)








$ 35000

$ 45750

$ 56500

$ 62250

   Software Licenses


$   7000

$   6000

$   5000

$   4500

   Hardware Upgrades


$   7000

$   6250

$   5500

$   4700








Table 2 – Formulae Used in the Worksheet


Total benefit

Sum of increased sales from products 1, 2, and 3

Discount rate

1/(1+Interest rate)n

Where n=number of years in future

Present value of benefits

=Total benefit * Discount Rate

Total Development cost

Labor cost + Training cost + Software cost + Hardware cost

Total Operating Costs

Salaries + Software Licenses + Hardware Upgrades

Total Costs

Total Development Cost + Total Operating Cost

Present Value of Total Costs

Total Costs * Discount Rate

Overall Net Present Value (NPV)

Present Value of all benefits*  – Present Value of all Total Costs*

Return on Investment

Overall NPV/Present Value of all costs*

Break-even Analysis (Yearly NPV Cash Flow)

Present Value of benefits for the year – Present value of total costs for the year

Break-even Analysis  ( Overall NPV Cash Flow)

Overall NPV Cash Flow of the previous year + Yearly NPV Cash Flow

Break-even Point

(Yearly NPV Cash Flow-Overall NPV Cash Flow)/ Yearly NPV Cash Flow.

Use the data from the year in which the overall NPV Cash Flow is Positive

*Over the duration of the project



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