Accounting Information Systems 1st Edition by Vernon Richardson,Chengyee Chang ,Rod Smith

Exercise 7

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:

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.

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?