Kế toán, kiểm toán - Chapter 14: Evaluating ais investments

Chapter 14Evaluating AIS InvestmentsCopyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Learning Objectives14-2LO#1 Articulate similarities and differences between major IT initiatives and other capital investmentsLO#2 Explain the major steps in the economic justification of an IT initiativeLO#3 Explain potential benefits of IT initiatives and how to evaluate themLO#4 Assess potential costs of IT initiatives and how to evaluate themLO#5 Describe potential risks of IT initiatives and corresponding risk mitigation techniquesLO#6 Apply capital budgeting techniques to assess the value of an IT initiativeLarge IT Projects Require Economic JustificationWorldwide IT spending forecast to exceed $4 trillion by 2015 (according to the Gartner Group in January 2013)IT projects require large amounts of capital and capital is limitedSelecting one project often means foregoing othersIT projects often involve changes in business processes that will affect substantial portions of the organizationCapital budgeting techniques provide a systematic approach to evaluating investments; yet, many organizations find it difficult to evaluate IT projects using traditional techniques.14-3LO# 1Business Case for IT InitiativesShould answer these questions:Why are doing this project?How does it address key business issues?How much will it cost and how long will it take?What is the return on investment and payback period?What are the risks of doing the project?What are the risks of not doing the project?What are the alternatives?How will success be measured?14-4LO# 2The Economic Justification Process14-5LO# 2Assessing Business RequirementsRefer to information on the balanced scorecard in Chapter 13IT initiatives should reduce one or more gaps between the firm’s current and desired performance levels as indicated by the firm’s strategy mapIT alone is usually not sufficient to achieve important changesConsider other enabling changes that in conjunction with the technology will accomplish substantial business change14-6LO# 214-7LO# 2Examples of Complementary ChangesTraining employees Redefining job descriptionsReconfiguring tasksOffering incentives to make changesOthers?14-8LO# 2Estimating BenefitsRevenue enhancement—creating new sales opportunitiesRevenue protection—protecting existing revenue streamsCost savings—opportunities to modify business processes to reduce low value-added or manually intensive activities, to improve capabilities to manage assets to increase efficiencies, or to reduce errorsCost avoidance—opportunities to modify business processes to avoid cost increases in the future14-9LO# 3Estimating Relevant CostsAcquisition CostsDirect costs to acquire and implementHardwareSoftwareNetworkingDevelopmentProject ManagementConsultingTrainingIndirect costs of the disruption to current operations14-10LO# 4Estimating Relevant CostsOperating CostsDirect costs necessary to operate, maintain, and administer the technologyHardware replacementsSoftware upgradesMaintenance contractsHelp desk support Ongoing trainingAdministration DecommissioningIndirect costs of user downtime and lost productivity, such as time spent on self-training, peer support, end user data management14-11LO# 4Assessing RisksAlignment risk—the solution is not aligned with the strategy of the firm.Solution risk—the solution will not generate projected benefits.Financial risk—the solution will not deliver expected financial performance.Project risk—the project will not be completed on time within budget.Change risk—the firm or part of the firm will not be able to change.Technological risk—the technology will not deliver expected benefits.14-12LO# 5Identifying Risk Mitigation Techniques14-13IT Initiative RisksRisk Mitigation ExamplesAlignment RiskUse the Balanced Scorecard Framework (Chapter 13) to assess the link to strategySolution RiskUse sensitivity analysis to consider likely alternative benefit levelsFinancial RiskInterview other users of similar IT; follow a structured Balanced Scorecard Management Process (Chapter 13)Project RiskAssure active top management support for the projectChange RiskConduct training and create employee incentives for successful use of the new ITTechnological RiskRequire hardware and software vendors to demonstrate that their systems can meet requirementsLO# 5Combining Benefits, Costs, and RisksFully understand the financial implications of the investmentDetermine the relevant time frame for costs and benefitsSelect appropriate discount rates to applyPrepare capital budgeting financial metrics Assess the sensitivity of results to the assumptionsSelect the best alternative and summarize the reasons for that choice14-14LO# 2Capital Budgeting Financial MetricsPayback period and breakeven analysis—both compare the costs with benefits of an IT project. The breakeven point is where the total value of benefits equals that of total costs. The payback is the number of periods needed to recover the project’s initial investment. Payback Period = Initial Investment/Increased cash flow per periodAssume an IT project is expected to cost $20,000 up front, and it will provide net benefits that average $16,000 per year for the next 3 years. Payback Period = $20,000/$16,000 = 1.25 years.14-15LO# 2Capital Budgeting Financial MetricsNet present valueSum of the present value present value of all cash inflows minus the sum of the present value of all cash outflows. Each cash outflow/inflow is discounted to its present value.14-16Present Value = CFt/(1 + r)t Where:CF = cash flow for period t, andr = discount rate (typically the firm’s weighted average cost of capital).LO# 2Capital Budgeting Financial MetricsInternal rate of return (IRR)Discount rate that makes the project’s net present value equal to zerofinancial calculators and spreadsheet software, such as Microsoft EXCEL, Microsoft Excel, use an iterative technique for calculating IRR. Starting with guess, they cycle through the calculations until the result is accurate. The IRR and NPV functions are related in that if you use the IRR as the discount rate (r) in calculating NPV, your NPV is zero14-17LO# 2Capital Budgeting Financial MetricsAccounting rate of return (ARR)The average annual income from the IT initiative divided by the initial investment cost14-18ARR = (average annual income from IT initiative) /(total IT initiative investment cost)LO# 2Strengths and Weaknesses of Financial Metrics14-19Financial MetricStrengthWeaknessPayback PeriodEasy to calculate and understand. Widely used. Ignores the time value of money as well as both costs and benefits occurring after the payback period.Accounting Rate of ReturnRelates estimates to standard accounting ratios using accrual accounting. Shows impact on operating income.Also ignores the time value of money. Assumes cash flows in all periods are similar.Net Present ValueConsiders the time value of money. Incorporates cash flows over the life of the IT initiative. Compares the dollar value of the benefits from an IT initiative to the initial investment.Larger projects tend to have larger net present values. Does not show rate of return on investment. Sensitive to discount rate applied.Internal Rate of ReturnConsiders the time value of money. Incorporates cash flows over the life of the IT initiative. Computes the unique rate of return for the initiative. Not sensitive to a selected discount rate.Fails to consider the size of the project. Sensitive to timing of the cash flows. LO# 2Example14-20Discount rate10%Project 1Year 0Year 1Year 2Year 3TotalAverageBenefits$20,000$20,000$30,000$70,000$23,333Costs$20,000$7,500$7,500$7,500$42,500$10,625Cash Flow-$20,000$12,500$12,500$22,500$27,500$15,833Payback1.26NPV$16,908 IRR52%Note that total cash flow is equal but NPV and IRR are not, due to time value of money. Try it in EXCEL using the NPV and IRR functions!LO# 2Test Sensitivity to Changes in Assumptions14-21LO# 2Prepare the Value PropositionAssemble the analysis for each alternative IT initiative and recommend the preferred alternatives.Focus on these five questions:The change and technology proposedThe anticipated benefits (related to the firm’s critical success factors)The group(s) within the firm that will benefitThe timing of the benefitsThe likelihood of achieving those benefits as planned14-22LO# 2