Question

In: Accounting

If the following table were presented comparing the costs and tangible benefits of two accounting information...

If the following table were presented comparing the costs and tangible benefits of two accounting information systems:

Costs and Tangible Benefits
System 1
System 2
Project completion time
1 year
1 year
Expected life of the system
5 years
5 years
One-time costs
$300,000
$140,000
Recurring costs incurred at beginning of years 1–5
$45,000
$55,000
Annual tangible benefits incurred at end of years 1–5
$170,000
$135,000
Based on this information, which system is likely to be chosen? Discuss in 80–100 words.

Solutions

Expert Solution

Analysis:-

System 1:
Initial cost = $300,000

Annual benefit = $170,000
Annual cost = $45,000
Net annual benefit = $125,000

Total Net benefit from the project = ($125,000 * 5) - $300,000
= $625,000 - $300,000
= $325,000

Profit % = $325,000 / 300,000 = 108.33%

System 2:
Initial cost = $140,000

Annual benefit = $135,000
Annual cost = $55,000
Net annual benefit = $80,000

Total Net benefit from the project = ($80,000 * 5 ) - $140,000
= $400,000 - $140,000
= $260,000

Profit % = $260,000 / 140,000 = 185.71%

Conclusion:
Based on the above calculations, if you make the decision by considering the net benefit from the project then System 1 should be taken because its net benefit is $325,000 which is higher than the System 2 with benefit of $260,000. But if we take the profit % as basis for making the decision then System 2 should be chosen because its benefit % from the project is 185.71% which is higher than System 1.


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