Question

Question 3

3.1. Describe four (4) types of appraisal methods to justify IT investment evaluation and its specified evaluation methods.

3.2. Discuss the Information Systems department and how it is utilized to manage End-User relationships. Include in your discussion an outline of the FOUR (4) ISD approaches that could be applied by an organisation.

Answer 1

Describe four (4) types of appraisal methods to justify IT investment evaluation and its specified evaluation methods.

Ans: -

In IT industry there several Investment appraisal techniques which are Payback Period, Profitability Index, Net Present Value and the accounting rate of return etc. For any new project to be established in an IT industry it is analysed and observed whether this project is profitable or not. Then these invest appraisal techniques comes into play to get idea about the outcome of that project. These different techniques have different methods for guessing profitable or non-profitable insights of any project.

1. Payback Period: -

This Investment appraisal technique is very commonly used technique in every organization. Payback Period is the time span which is taken by any project to cover up the initial investment on the project. When the amount that company has invested on any project gets cover up then the company starts to earn profit. This time period is known as payback period in which company gets all the initial amount of the money that company has invested into the project. This method is very simple and easy to calculate. The payback period can be easily estimated by performing some calculation regarding the resources and workforce required for the completion of the project.

2. Profitability Index: -

Profitability Index is another method for investment evaluation for any project. In this method the profit index is calculated according to the initial investment and the future returns on every bunch of money that company has spent on the project. It simply defines that how much amount of profit you will for every rupee or dollar you have spent.

The estimated cash profit is divided with the initial investment cost of the project and then this index is calculated. For e.g.: - If the estimated future cash return is 15000 in dollars and initial investment cost is 10000 in dollars then 15000/10000 is 1.5. So, 1.5 is the profitability index.

3. Accounting Rate of Return: -

This method calculates the estimated profit for any investment that has been made for the project. It estimates the net profit for the investment as the total amount invested that is known as capital investment.

For e.g.: - A company is investing in the project in which one resource is required to be replaced and that resource will cost 60000 and give the profit of 30000 annually and maintenance cost for that resource will be 10000.

So, the Accounting rate of return will be calculated as follows: -

Monthly expenses per year = 60000/ 12 = 5,000

Increase in average annual profit = 30000 – (10,000 + $ 5,000) = 15,000

Initial investment = 60000

ARR = (15,000 / 60,000) * 100 = 25%

4. Internal Rate of Return: -

There is the rate of the discount given in initial investment which will let the discounted future cash returns for the projects. Discounting rate is the net value which has no loss or profit for the company.

These are the investment appraisal techniques in IT industry.

There are the evaluation and specification methods which are considered while deciding the investment appraisals on any project.

Risk Analysis for the project: - The risk of the project is analysed as the feasibility of project and its profitability capability is analysed completely by considering all the risk and uncertainties that could happen during the project life cycle.

Project Length: - The project length is estimated because the longer project could lead to the loss in terms of time and money.

Initial Investment: - All the initial investment cost for the project is estimated and evaluated.