The Robert's Company, which is switching from a batch-oriented system to an interactive-oriented management information system, conducted a study to evaluate the feasibility of making the transition. This project centers currently on the first step of the feasibility study-in particular, the financial aspects of the exploratory survey. In the exploratory survey report to the MIS executive steering committee, financial data on five feasible system alternatives were developed. The data below were used in calculating the net savings (losses) before federal income taxes for MIS system alternative #1. The company expects a 20 percent return after federal income taxes, discounted back to the present time.

Estimated savings-first year, $120,000

Estimated savings-second year, $300,000

Estimated savings-third, fourth, and fifth years,

add 7 percent to each previous year

Estimated one-time costs-first year, $450,000

Estimated additional operating costs-first year, $110,000

Estimated additional operating costs-second year, $140,000

Estimated additional operating costs-third, fourth, and fifth years, add 7

Percent to the previous year

Federal income taxrate-48 percent

Present value of $1 at 20 percent-first year (calculate with Excel formula)

Present value of $1 at 20 percent-second year, (calculate with Excel formula)

Present value of $1 at 20 percent-third year, (calculate with Excel formula)

Present value of $1 at 20 percent-fourth year, (calculate with Excel formula)

Present value of $1 at 20 percent-fifth year, (calculate with Excel formula)

Based upon these facts, determine whether or not the company should study the intangible benefits if the present value of net savings at 20 percent for system alternative #1 is negative after considering all tangible benefits. Assume five-year savings and costs projections that start after the completion of the feasibility study.

Use the template in next page as a guide.

The Roberts Company

MIS Alternative #l

Estimated Net Savings on a Rental Basis Over Five Years Years

Years from start of system implementation

123455-Year Tot

--------------------------------------------

Estimated Savings

Estimated One-Time

Costs

Estimated Addition

at Operating Cost

Total Costs

Net Savings (Losses

Before Federal

Income Taxes)

The Roberts Company

MIS Alternative #1

Discounted Cash Flow - 20% Return After Federal Income Taxes on

A Rental Basis Over a Five-Year Period

Net SavingsFederal IncomeNet Savings---------- At 20%----------

(Losses)BeforeTax RateLosses)AfterPresentPre Value

YearFederal Incomeat a 48%Federal IncValue ofof Net Savings

TaxesRateTaxes$1.00(Losses)

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3

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5

Totals