Accounting Information Systems Study Set 26

Business

Quiz 13 :
Information Security and Computer Fraud

Quiz 13 :
Information Security and Computer Fraud

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An important first step in the economic justification process is to assess business requirements. How would the Balanced Scorecard framework presented in Chapter 13 help companies assess their business requirements for IT?
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Economic Justification: In general, it is the comparison among various alternatives and chooses the most economic alternative from them which is in the favor of the company as well as other things which get affected from that decision.
For the improvement in the working of the company, IT plays a major role. It must include complementary changes in business processes.
In Balance score card companies placing the investment in a cause-and-effect structure to assess their business requirements for IT. As per the economical strategy a company comes to know about, how the proposed investment either improves the organization's value and therefore leads to revenue growth (both in customer financial perspectives) or reduces business process cost (process perspective). It also shows that how the investment is reliable with the organization's strategy which helps to mitigate alignment risk.
Additionally, it also helps in required training and employees incentives necessary for making the IT effective and also results in reduction of change risk.

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Which of the following is a question that companies should answer when preparing the business case for an IT investment? a. How much will it cost? B) What are the risks? C) What are the alternatives? D) How will success be measured? E) All of the above
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Organizations today are growing in scale and have made improvement in their processes, practices of the project management. It assesses their current practices compared to the recognized best practices of the industry. It also helps in focusing on opportunities which can initiate developments in the performance and the results too at business level. But there are various other IT projects for which alternatives available to implement. Hence, they need to be evaluated before their implementation.
The series of questions generally upsurge while making an IT investment which can be depicted as:
1. What is the purpose of that project?
2. Which business issues will be covered by this project?
3. What will be the cost of this project (as the project needs to be at the limit of finance available in the firm)?
4. What is the return of that project and possible associated risks to it. It implies that the return should be more than initial investment and minimum risks should be present.
5. Are there any alternatives available in respect to the project, which requires less finance or heavy returns?
6. If the project had implemented, what techniques will be required to measure its success?
After getting answers of above all questions only decision is required to be taken.
Option a is correct as cost is the important part of project implementation as specified above.
Option b is correct as associated risks to project are the important part of the project implementation as specified above.
Option c is correct as alternatives are the important part of project implementation as specified above.
Option d is correct as the evaluation of success is the important part of project implementation as specified above.
The option e indicates that all the options (costs, related risks, available alternatives, techniques for success evaluation) is correct because firms require minimum investment and maximum return from any large IT project. Thus, the option
img is correct.

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Slow Rider Inc. had a rudimentary business intelligence (BI) system. Analysts at Slow Rider Inc. pulled data from three different ERP systems, loaded the data into Excel spreadsheets, and e-mailed those spreadsheets to the senior managers each month. However, some managers complained that they didn't understand how to get the information they needed, others complained that the data were not accurate, and still others ignored the spreadsheets. Slow Rider established a project team to look at acquiring a state-of-the-art business intelligence system. After several interviews with all the managers, the project team was ready to develop the business case. The project team estimated benefits of the new BI system as follows: • 5 percent increase in sales through better-focused sales campaigns, which should increase gross margins by $200,000 in year 1 and $300,000 in years 2 and 3. • 10 percent increase in inventory turnover through better purchasing, which should reduce inventory carrying costs by $100,000 in year 1 and $150,000 in years 2 and 3.The project team estimated costs over an expected 3-year life as follows: img After interviewing managers at other firms that have already implemented similar BI systems, the project team then estimated that the initiative would have the following risks. img a. Disregarding the risk, calculate the following for the BI investment: (1) The payback period (2) The NPV (assume 10% percent discount rate) (3) The IRR (4) The accounting rate of return b. Recalculate the payback period, NPV, IRR, and ARR considering the risk. c. Prepare a value proposition for the BI investment. Should Slow Rider pursue the investment? What other issues should they consider?
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Pay Back Period: It is the time period required to cover the cost of Investment. It is relevant for decision making to Investors.
Net Present Value (NPV): It is the difference between the present value (PV) of cash inflows and present value (PV) of cash outflows of the project and it is relevant for decision making.
Internal Rate of Return (IRR): It is that rate of return under which, the present value (PV) of cash inflow is equals to the present value (PV) of cash outflow. In other words, the net present value (NPV) of the Investment becomes nil.
Accounting Rate of Return (ARR): Accounting rate of return means the return earned by an investor in the proposed project. Under this method the time value of money is not considered.
a.
Company ABC has following information without considering the risk factors and it is presented in the table using Excel sheet is given below:
img The result of the above Excel sheet is given below:
img Net benefit from the project is calculated through the deduction of cost element from the benefits earned in the project.
From the information given above it is required the following:
(1)
Calculate the Payback period of the project:
img Hence, the payback period of the project is
img (2)
Calculate the Net Present Value (NPV) of the project. Following is the calculation of NPV using the Excel sheet:
img The result of the above Excel sheet is given below:
img Hence, the Net Present Value (NPV) of the project is
img (3)
Calculate the Internal rate of return (IRR) of the project. Following is the calculation of IRR using the Excel sheet:
img The result of the above Excel sheet is given below:
img Hence, the IRR of the project is
img (4)
Calculate the Accounting rate of return (ARR) of the project.
img Hence, the ARR of the project is
img b.
The following information after considering risk factors is presented in the table given below using Excel sheet:
img The result of the above Excel sheet is given below:
img Net benefit from the project is calculated through the deduction of cost element from the benefits earned in the project.
Working Note 1:
Following is the calculation of Increase in gross margin when sale is increase by 3% using Excel sheet:
img The result of the above Excel sheet is given below:
img Working Note 2:
Following is the calculation of reduction in carrying cost when inventory turnover is increase by 5% using Excel sheet:
img The result of the above Excel sheet is given below:
img (1)
Calculate the Payback period of the project:
img Hence, the payback period of the project is
img (2)
Calculate the Net Present Value (NPV) of the project. Following is the calculation of NPV using the Excel sheet:
img The result of the above Excel sheet is given below:
img Hence, the Net Present Value (NPV) of the project is
img (3)
Calculate the Internal rate of return (IRR) of the project. Following is the calculation of IRR using the Excel sheet:
img The result of the above Excel sheet is given below:
img Hence, the IRR of the project is
img (4)
Calculate the Accounting rate of return (ARR) of the project.
img Hence, the ARR of the project is
img c.
Value proposition is the final step which assembles the cost, benefits and risks of the project outlined above. Based on the above financial measures and risk analysis, company should pursue the project. However, this analysis has not considered whether company's employees will be willing to change (change risk) or whether this investment is consistent with company's strategy (alignment risk). Additionally the sensitivity analysis is limited.

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Chapter 13 described three types of IT: function, network, and enterprise IT. Consider the diagram shown in Figure 14.2. Which type of IT is likely to have the greatest impact on business performance? Which type of IT would require the most complementary changes? Why? img img
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What is the first step in the economic justification process? a. Identify potential solutions. B) Assess the value proposition. C) Assess business requirements. D) Estimate costs. E) All of the above.
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The Beach Dude Inc. (BD) sells surf gear and clothing to retail stores around the country. It outsources the production of most of its items, so its warehouse is very busy receiving incoming shipments and preparing deliveries to customers. After a thorough review of its warehouse processes, the company determined that it could save substantial employee time and improve its on-time delivery rates if it adopted a warehouse management system using RFID chips and readers. RFID (radio-frequency identification) is a technology that uses radio waves to automatically identify people or objects. RFID tags are applied to packages, and then RFID readers can be used to track the location and movement of the inventory. BD estimates that the RFID system-including fixed and mobile scanners, software, servers, installation, and integration with its existing AIS-will cost $400,000. The system has an expected useful life of 5 years and is expected to have a negligible value at that time. Training for the warehouse, IT, and accounting employees is expected to cost an additional$25,000. Additionally, the company's estimate for the cost of RFID tags is $30,000 per year based on the current $0.15 cost per tag. However, it believes there is a 50 percent probability that the cost per tag will decrease to $0.10 per tag in 2 years. BD estimates that it will save $150,000 per year in reduced employee overtime, fewer priority shipments, reduced inventory losses, and improved inventory turnover. Assume that BD has a cost of capital of 6 percent. a. Calculate the following for BD's investment, assuming there is no reduction in the cost of RFID tags: (1) The payback period (2) The NPV (3) The IRR (4) The accounting rate of return b. Recalculate those values, assuming that the cost of RFID tags does decrease in 2 years as expected. c. Identify some potential risks and possible omissions in BD's planning. Provide examples of situations that would lead to the risks that you identify.
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The benefits of an IT initiative should be measured in comparison to the revenues and costs that will occur if the IT initiative is not implemented. What issues would a project team face when making this comparison? How does it affect the team's assessment of risks?
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Which of the following is a not an example of a complementary change necessary to allow an IT initiative to achieve its goals? a. Outsource the IT initiative. B) Retrain employees. C) Redefine job descriptions. D) Provide incentives for employees to make the change successfully. E) None of the above
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Refer to the Starbucks vignette at the beginning of this chapter. Starbucks has aggressively pursued digital ventures to improve the customer experience and increase the amount of customer transactions per visit. Among other things, Starbucks mines the data from customer loyalty cards to examine buying patterns to predict what customers will buy in the future. It is looking for an increased "wallet-share." a. Describe why it is difficult to evaluate Starbucks' digital ventures investments using traditional capital budgeting techniques. b. What are some other ways that Starbucks could evaluate the benefit of its digital ventures?
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Use Microsoft Excel to assess the NPV of an IT initiative. The initiative will require an initial investment of $250,000 and is expected to return $150,000 per year for the next 3 years. Assume a discount rate of 10 percent. What is the NPV? How does the NPV change if the discount rate is 15 percent? Describe how changes in the discount rate assumption can affect the NPV.
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Which of the following is not an example of benefits of an IT investment? a. Increased revenues from access to new markets B) Decreased costs from automating manual tasks C) Facilitating employee work-from-home arrangements D) Allowing compliance with new federal regulations E) Reducing the number of inventory count errors
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Sunset Graphics is considering two mutually exclusive projects. Both require an initial investment of $100,000. Assume a marginal interest rate of 10 percent and no residual value for either investment. The cash flows for the two projects are expected to be the following: img a. Compute the NPV, payback, and IRR for both projects. Which is most desirable? b. Assume straight-line depreciation is used for both projects; compute the accounting rate of return. What do you think of the ARR criterion? c. Assume a change in interest rate to 15 percent. Does that change your views on which project the company should adopt? d. Assume a change in interest rate to 6 percent. Does that change your views on which project the company should adopt? e. For investments in technology, which cash inflow projection is most likely?
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Use Microsoft Excel to assess the internal rate of return for an IT initiative. Suppose the initial investment is $70,000. The returns on investment in dollars for the following5 years are (a) $12,000, (b) $15,000, (c) $18,000, (d) $21,000, and (e) $26,000. Use the IRR function to compute the internal rate of return after 2, 3, and 5 years. Next, assume that the loan for the initial $70,000 is at 8 percent and you are earning 15 percent on the annual returns. Use the MIRR function to calculate the internal rate of return. Is the annual rate of return higher when using the MIRR function than the IRR function? Under what circumstances would it be lower?
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Which of the following can be used to quantify benefits on an IT investment? a. Gathering expert opinions B) Benchmarking against competitor performance C) Comparing against the probability of future benefits if investment is foregone D) Conducting simulations E) All of the above
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Sunset Graphics is considering moving to a cloud-based accounting system because its current system only runs on outdated computers. The cloud-based system is very similar to the current system, so there would be no additional training required. The cloud-based system will cost $1,500 per month for the next 36 months. The company will write off its old equipment and record a corresponding loss of $2,000. It will buy five new computers to access the cloud at a total cost of $2,200. Their alternative is to purchase a new local accounting system. If it pursues this alternative, the company will also spend $2,200 on five new computers and write off the old hardware and software. The new software will cost $40,000. Sunset Graphics uses a discount rate of 10 percent. a. Which alternative is the best solution? Why? What factors would influence your decision? b. Assume the local accounting system is expected to last 5 years but will require a major upgrade costing $15,000 at the end of year 3. Also assume that the cost of cloud-based system will fall to $1,200 per month for months 37-60. Neither alternative will have any residual value. Compare the two alternatives again.
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Consider two projects. Project 1 costs $272,000 and returns $60,000 per year for 8 years. Project 2 costs $380,000 and returns $70,000 per year. Project 2 is determined as less risky, so your company only requires an 8 percent minimum annual return compared to10 percent for project 1. What is the NPV of each project? What is the absolute maximum that the company should consider investing in each project?
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Which of the following are examples of direct costs of acquiring and implementing an IT investment? a. Hiring consultants to assess system requirements B) Personnel costs of the project team C) Training costs of employees who will use the system D) Cost of new computer hardware necessary to run the system E) All of the above are direct costs of acquiring and implementing an IT investment.
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Your company has just completed a major IT initiative and is reviewing the outcome. It notes that the project took 3 months longer than expected. As part of the project, the company wanted to use some automatic bar code readers, but the rate of correct bar code reads was below the expected rate. Although managers were worried about employee acceptance of the new system, it appears that the employees have embraced it and, as a result, are making it work better than expected. Refer to Table 14.1 and identify how these results address the risk categories listed in the table. img
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Which of the following are not examples of operating costs for an IT investment? a. Costs of routine hardware replacements over time B) Cost of contract for help desk support C) Costs of disposal of electronics at end of life D) Costs of software license renewals E) All of the above are examples of operating costs.
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Congratulations. You've won the state lottery. You have a choice of three options:(a) $12 million 5 years from now, (b) $2.25 million at the end of each year for 5 years, or(c) $10 million 3 years from now. Assume you can invest at 8 percent, which option would you prefer?
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