Advanced: Sensitivity analysis and a discussion of how to measure benefits which are difficult to quantify The followtng data have been collected as part of a feasibility study covering the introduction of a new accounting information system.

The company concerned seeks a 20% internal rate of return. Ignore tax.

You are required to:
{a) carry out the appraisal and calculate the sensitivity of the results to the following factors: reduction in clerical costs, system design, test, the required DCF return; (8 marks)
{b) explain the purposes and limitations of the sensitivity tests;
(6 marks)
{c) explain, with respect to the items listed as 1, 2 and 3 under Benefits, how you might approach the problem of obtaining quantitative information.

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Costs Years Computer and support equipment lease Other equipment purchases Maintenance 0 1 2 3 4 5 (000) (000) (2000) (000) (2000) (2000) 5252 2252 2152 10 25 25 15 15 2 2 - 5 5 Supplies 2 2.5 2.5 Re-layout of room 4 1 Direct charges including personnel System design, test and 25 30 30 30 30 implementation 15 15 Training 52 10 Total costs 15 78 88.5 64.5 64.5 62.5