Student No.: 137588
Economics and Strategy in the Digital Age
Thomas Frick
May 15. 2020
BSc Business Administration & Digital Management
Pages: 15
Characters: 24,985
0
,Student No.: 137588
1. Please conduct a cost-benefit analysis for the decision to purchase the
declaration system. In the analysis, please consider potential opportunity
costs and explain whether you recommend purchasing the system.
To figure out whether the Ministry of foreign affairs should implement the system, a
cost-benefit analysis should be conducted:
If the benefit of implementing the system is larger than the cost, the ministry should
make the investment and implement it.
If B(x) > C(x), do x, otherwise don’t.
I conduct the calculation by using the statistics provided in the mail. Since the
statistics in the mail are given for a 1-year horizon, the following calculation is also
for a 1-year horizon. The cost-benefit calculations cover the 1. year of
implementation.
I consider the following benefits of implementing the system:
B(x) = Benefits of implementing the system
• Yearly accountant declaration, as numeric monetary value:
153,536.691 𝐷𝐾𝐾
• Yearly travel employee declaration, as numeric monetary value:
727,599.192 𝐷𝐾𝐾
C(x) = Costs of implementing the system
• One-time cost of system installation: 20,000.00 𝐷𝐾𝐾
• Yearly application cost: 200,000.00 𝐷𝐾𝐾
The total cost-benefit will be:
𝐵(𝑥) − 𝐶(𝑥) =
(153,536.69 𝐷𝐾𝐾 + 727,599.19 𝐷𝐾𝐾) − (20,000.00 + 200,000.00) =
1 Calculations can be found in appendix 1
2 Calculations can be found in appendix 1
1
, Student No.: 137588
661,135.88
The net benefit of implementing the system, the first year, is 661,135.88. DKK. It will
increase the 2nd year since the 20,000.00 application cost only has to be taken into
consideration the first year. If the amount of employees surpass a 1000 a marginal
cost will be added. The C(x) will increase with 100 DKK per user a year. Since the
current number of employees is 257, it’s reasonable to assume that the surpass of
1000 won’t happen in the near future and therefore is irrelevant. Finally, the mail
states the server the application will be located on has a price of 100,000.00 DKK.
It’s a sunk cost and therefore irrelevant as well.
Potential opportunity costs of implementing the system could be the need of
investing in complimentary assets - for instance education regarding the use of the
new IT resources. So the ministry should take that into consideration. However, as
long as the cost of the complimentary assets stays under the net-benefit, the system
purchase stays desirable.
Based on the cost-benefit calculations and reflections seen above, I recommend the
Ministry to purchase the system, because the net-benefit of doing it is positive.
2. a) Suggest an approach to collect the information necessary to calculate the
consumer surplus generated by the declaration system. Explain how to
calculate the consumer surplus from this data and visualize the consumer
surplus generated from the application (without referring to any actual
data).
I suggest following approach to collect the needed information:
Base the maximum price willing to pay on B(x) from task 1, base the quantity
demanded at equilibrium on the number of relevant employees, and base the
actual market price on the C(x) from task 1.
For the suggestion to be valid I make following 2 assumptions:
1. The Ministry aims for saving money - no other factors are affecting the its
willingness to pay.
2. The actual market follows the price equilibrium.
3. The calculations and assumptions in task 1 are correct.
Similarly to task 1, task 2 will be visualized and calculated for a 1-year horizon, and
it’ll be the first year. The Ministry as a unit is the consumer and it only has to
purchase 1 unit of the system.
2
Economics and Strategy in the Digital Age
Thomas Frick
May 15. 2020
BSc Business Administration & Digital Management
Pages: 15
Characters: 24,985
0
,Student No.: 137588
1. Please conduct a cost-benefit analysis for the decision to purchase the
declaration system. In the analysis, please consider potential opportunity
costs and explain whether you recommend purchasing the system.
To figure out whether the Ministry of foreign affairs should implement the system, a
cost-benefit analysis should be conducted:
If the benefit of implementing the system is larger than the cost, the ministry should
make the investment and implement it.
If B(x) > C(x), do x, otherwise don’t.
I conduct the calculation by using the statistics provided in the mail. Since the
statistics in the mail are given for a 1-year horizon, the following calculation is also
for a 1-year horizon. The cost-benefit calculations cover the 1. year of
implementation.
I consider the following benefits of implementing the system:
B(x) = Benefits of implementing the system
• Yearly accountant declaration, as numeric monetary value:
153,536.691 𝐷𝐾𝐾
• Yearly travel employee declaration, as numeric monetary value:
727,599.192 𝐷𝐾𝐾
C(x) = Costs of implementing the system
• One-time cost of system installation: 20,000.00 𝐷𝐾𝐾
• Yearly application cost: 200,000.00 𝐷𝐾𝐾
The total cost-benefit will be:
𝐵(𝑥) − 𝐶(𝑥) =
(153,536.69 𝐷𝐾𝐾 + 727,599.19 𝐷𝐾𝐾) − (20,000.00 + 200,000.00) =
1 Calculations can be found in appendix 1
2 Calculations can be found in appendix 1
1
, Student No.: 137588
661,135.88
The net benefit of implementing the system, the first year, is 661,135.88. DKK. It will
increase the 2nd year since the 20,000.00 application cost only has to be taken into
consideration the first year. If the amount of employees surpass a 1000 a marginal
cost will be added. The C(x) will increase with 100 DKK per user a year. Since the
current number of employees is 257, it’s reasonable to assume that the surpass of
1000 won’t happen in the near future and therefore is irrelevant. Finally, the mail
states the server the application will be located on has a price of 100,000.00 DKK.
It’s a sunk cost and therefore irrelevant as well.
Potential opportunity costs of implementing the system could be the need of
investing in complimentary assets - for instance education regarding the use of the
new IT resources. So the ministry should take that into consideration. However, as
long as the cost of the complimentary assets stays under the net-benefit, the system
purchase stays desirable.
Based on the cost-benefit calculations and reflections seen above, I recommend the
Ministry to purchase the system, because the net-benefit of doing it is positive.
2. a) Suggest an approach to collect the information necessary to calculate the
consumer surplus generated by the declaration system. Explain how to
calculate the consumer surplus from this data and visualize the consumer
surplus generated from the application (without referring to any actual
data).
I suggest following approach to collect the needed information:
Base the maximum price willing to pay on B(x) from task 1, base the quantity
demanded at equilibrium on the number of relevant employees, and base the
actual market price on the C(x) from task 1.
For the suggestion to be valid I make following 2 assumptions:
1. The Ministry aims for saving money - no other factors are affecting the its
willingness to pay.
2. The actual market follows the price equilibrium.
3. The calculations and assumptions in task 1 are correct.
Similarly to task 1, task 2 will be visualized and calculated for a 1-year horizon, and
it’ll be the first year. The Ministry as a unit is the consumer and it only has to
purchase 1 unit of the system.
2
