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20.4 The controller of Tim’s Travel (TT) is deciding between upgrading the company’s existing
computer system or replacing it with a new one. Upgrading the four-year-old system will cost
$97,500 and extend its useful life for another seven years. The book value is $19,500, although
it would sell for $24,000. Upgrading will eliminate one employee at a salary of $19,400; the
new computer will eliminate two employees. Additional annual operating costs are estimated
at $15,950 per year. Upgrading is expected to increase profits 3.5% above last year’s level of
$553,000.
The BetaTech Company has quoted a price of $224,800 for a new computer with a useful life
of seven years. Annual operating costs are estimated to be $14,260. The average processing
speed of the new computer is 12% faster than that of other systems in its price range, which
would increase TT’s profits by 4.5%.
Tim’s present tax rate is 35%, and the cost of financing (minimum desired rate of return) is 11%.
After seven years, the salvage value, net of tax, would be $12,000 for the new computer and
$7,500 for the present system. For tax purposes, computers are depreciated over five full years
(six calendar years; a half year the first and last years), and the depreciation percentages are
as follows:
Year Percent (%)
1 20.00
2 32.00
3 19.20
4 11.52
5 11.52
6 5.76
Using a spreadsheet package, prepare an economic feasibility analysis to determine if Tim’s
Travel should rehabilitate the old system or purchase the new computer. As part of the
analysis, compute the after-tax cash flows for years 1 through 7 and the payback, NPV, and
IRR of each alternative.
As shown below, Tim’s Travel would be better off economically to purchase a new system rather
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20.5. Rossco is considering the purchase of a new computer with the following estimated costs:
initial systems design, $54,000; hardware, $74,000; software, $35,000, one-time initial
training, $11,000; system installation, $20,000; and file conversion, $12,000. A net reduction of
three employees is expected, with average yearly salaries of $40,000. The system will decrease
average yearly inventory by $150,000. Annual operating costs will be $30,000 per year.
The expected life of the machine is four years, with an estimated salvage value of zero. The
effective tax rate is 40%. All computer purchase costs will be depreciated using the
straight-line method over its four-year life. Rossco can invest money made available from the
reduction in inventory at its cost of capital of 11%. All cash flows, except for the initial
investment and start-up costs, are at the end of the year. Assume 365 days in a year.
Use a spreadsheet to perform a feasibility analysis to determine if Rossco should purchase the
computer. Compute the following as part of the analysis: initial investment, after-tax cash
flows for years 1 through 4, payback period, net present value, and internal rate of return.
Rossco should proceed with the purchase. The internal rate of return of 23.23% is higher than the
Accounting Information Systems
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20.6 A recently completed feasibility study to upgrade XYZ’s computer system shows the following
benefits. Compensation figures in parentheses include wages, benefits, and payroll taxes.
1. Production
a. Market forecasts, which take two $400 person-days a month, will be more accurate
2. Engineering
a. Computerized updating of bills of material and operations lists will save 40% of an
3. Sales. Improved reporting will enable the five-person sales staff to react more quickly to
4. Marketing. Revised reports and an improved forecasting system will increase net income
5. Accounting
a. Quickly determining new product costs will save 30% of the accountant’s ($100,000)
As a board member, which of the benefits can you defend as relevant to the system’s cost
justification? Calculate how much XYZ will save with the new system.
Adapted from the SMAC Exam
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Acceptable Items: Cost Savings
1 (a) More accurate market forecasts with software
making the calculations reduces costs
$ 9,600 ($400/day * 2 days/month * 12 months
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20.7 The following list presents specific project activities and their scheduled starting and completion
times:
Activity Starting Date Ending Date
A Jan. 5 Feb. 9
B Jan. 5 Jan. 19
a. Using a format similar to that in Figure 18-3, prepare a Gantt chart for this project. Assume
that each activity starts on a Monday and ends on a Friday.
Project Planning Chart
b. Assume today is February 16 and activities A and B have been completed, C is half
completed, F is a quarter completed, and the other activities have not yet commenced.
Record this information on your Gantt chart. Is the project behind schedule, on
schedule, or ahead of schedule? Explain.
Partially Completed Gantt chart
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Once the activity bars have been filled in to reflect the activities that have been fully or partially
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c. Discuss the relative merits of the Gantt chart and PERT as project planning and control
tools.
Advantages of PERT:
Indicates which activities are critical as well as how much slack is available in the
Advantages of GANTT Charts:
It is easier to prepare than a PERT chart.
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