Describe economic feasibility analysis. What techniques are used in economic feasibility analysis?
What will be an ideal response?
Answer: The capital budgeting model is used as the foundation for economic feasibility analysis. In this model, cost savings and other (even intangible) benefits, as well as initial outlay costs, operating costs, and other cash outflows are quantified in terms of dollars and cents. The tangible and intangible benefits include cost savings; improved customer service, overall increased productivity; improved decision making and data processing; better management control; and increased job satisfaction and employee morale. The costs include: software acquisition; design; programming; testing; documentation and maintenance costs; site preparation; and human resource costs such as hiring, testing, and relocation. The capital budgeting model is used as a framework for economic feasibility analysis. The three techniques that are used are: — Payback period: The number of years for the net savings to recover the initial costs of the investment is calculated. A project with the shortest payback period is preferable under this method. — Net Present Value (NPV): A discount rate representing the time value of money is used to discount all future cash flows to the present. The initial outlay costs are deducted from discounted cash flows to obtain net present value. A positive NPV indicates favorable economic feasibility. — Internal Rate of Return (IRR): IRR is the effective interest rate that results in an NPV of zero. This effective interest rate is compared with a company's desired rate of return (sometimes it can be the cost of capital). A project with the highest IRR will be selected when this method is used for evaluation purposes.
You might also like to view...
Which of the following is considered a disposal of a significant component of a business?
A. Shifting production activities from one location to another B. Elimination of a major class of customers C. Phasing out of a model D. Disposal of part of a line of business
In which of the following situations does the auditor potentially lack objectivity?
a) an auditor reviews the procedures for a new electronic data interchange connection to a major customer before it is implemented b) a payroll accounting employee assists an auditor in verifying the physical inventory of small motors c) an auditor discusses a significant issued with the vice president to whom the auditee reports prior to drafting the audit report d) an auditor recommends standards of control and performance measures for a contract with a service organization for the processing of payroll and employee benefits e) a former purchasing assistant performs a review of internal controls over purchasing seven months after being transferred to the internal auditing department