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 tax rate-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 this template 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

1 2 3 4 5 5-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 Savings Federal Income Net Savings ---------- At 20% ----------

(Losses)Before Tax Rate Losses)After Present Pre Value

Year Federal Income at a 48% Federal Inc Value of of Net Savings

Taxes Rate Taxes $1.00 (Losses)

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1

2

3

4

5

Totals