Question:

The benefits of the new system are expected to come from two sources: increased sales and lower
inventory sales. Sales are expected to increase by $30,000 in the first year of the system’s operation
and will grow at a rate of 10% each year thereafter. Savings from lower inventory levels are
expected to be $15,000 per year for each year of the project’s life.
(a) Using a format similar to spreadsheet in this chapter, develop a spreadsheet that
summarizes this project’s cash flow, assuming a four-year useful life after the project is
developed. Compute the present value of the cash flows, using an interest rate of 9%.
(b) What is the NPV for this project?
(c) What is the ROI for this project?
(d) What is the break-even point?
(e) Should this project be accepted by the approval committee?

Spreadsheet / Answers:
INITIAL TECHNIQUE TABLE
Year 0 Year 1 Year 2 Year 3 Year 4 Total
Benefits
Increased Sales $ 30,000 $ 33,000 $ 36,300 39,300 $ 138,600
Annual Growth $ 3,000 $ 3,300 $ 3,630 $ 3,930 $ 13,860
Inventory Savings $ 15,000 $ 15,000 $ 15,000 $ 15,000 $ 60,000
Total Benefit $ 45,000 $ 48,000 $ 51,300 $ 54,930 $ 199,230
Development Costs
System Analyst $40,000 0 0 0 0 $40,000
Programmer Analyst $35,000 0 0 0 0 $35,000
GIU Designer $8,000 0 0 0 0 $8,000
Telecommunications $2,500 0 0 0 0 $2,500
Specialist
System Architect $5,000 0 0 0 0 $5,000
Database Specialist $675 0 0 0 0 $675
System Librarian $3,750 0 0 0 0 $3,750
Oracle Training Registration $ 14,000 0 0 0 0 $ 14,000
Development Server $ 18,700 0 0 0 0 $ 18,700
Server Software $ 1,500 0 0 0 0 $ 1,500
DBMS Server Software $ 7,500 0 0 0 0 $ 7,500
DBMS Client Software $ 6,650 0 0 0 0 $ 6,650
Total Development Costs $ 143,275 0 0 0 0 $ 143,275
Operational Costs
Programmer Analyst $8,750 $8,750 $8,750 $8,750 $ 35,000
System Librarian $300 $300 $300 $300 $ 1,200
Maintenance Agreement $ 995 $ 995 $ 995 $ 995 $ 3,980
for Server
Maintenance Agreement $ 525 $ 525 $ 525 $ 525 $ 2,100
for Server
DBMS Software Preprinted $ 33,300 $ 33,300 $ 33,300 $ 33,300 $ 132,200
Forms
Total Operational Costs $ 43,870 $ 43,870 $ 43,870 $ 43,870 $ 175,480
Total Costs $ 143,275 $ 43,870 $ 43,870 $ 43,870 $ 43,870 $ 318,755
Total Benefits – Total Costs ($ 143,275) $ 1,130 $ 4,130 $ 7,430 $ 11,060 ($ 119,525)
Cumulative Net Cash Flow ($ 143,275) ($ 142,145) ($ 138,015) ($ 130,585) ($ 119,525)
Return on Investment -37.5%
Break-even Point 14.81 years

FINAL TECHNIQUE TABLE

Year 0 Year 1 Year 2 Year 3 Year 4 Total
Benefits
Increased Sales $ 30,000 $ 33,000 $ 36,300 39,300

Annual Growth $ 3,000 $ 3,300 $ 3,630 $ 3,930

Inventory Savings $ 15,000 $ 15,000 $ 15,000 $ 15,000
Total Benefit $ 45,000 $ 48,000 $ 51,300 $ 54,930

Present Value Total Benefits $ 41,284 $ 40,401 $ 39,613 $ 38,914 $ 160,212

Development Costs
System Analyst $40,000 0 0 0 0
Programmer Analyst $35,000 0 0 0 0
GIU Designer $8,000 0 0 0 0

Telecommunications $2,500 0 0 0 0
Specialist
System Architect $5,000 0 0 0 0

Database Specialist $675 0 0 0 0

System Librarian $3,750 0 0 0 0
Oracle Training Registration $ 14,000 0 0 0 0

Development Server $ 18,700 0 0 0 0

Server Software $ 1,500 0 0 0 0
 DBMS Server Software $ 7,500 0 0 0 0

DBMS Client Software $ 6,650 0 0 0 0

Total Development Costs $ 143,275 0 0 0 0
Operational Costs

Programmer Analyst $8,750 $8,750 $8,750 $8,750

System Librarian $300 $300 $300 $300

Maintenance Agreement $ 995 $ 995 $ 995 $ 995

for Server
Maintenance Agreement $ 525 $ 525 $ 525 $ 525
for Server
DBMS Software Preprinted $ 33,300 $ 33,300 $ 33,300 $ 33,300
Forms
Total Operational Costs $ 43,870 $ 43,870 $ 43,870 $ 43,870
Total Costs $ 143,275 $ 43,870 $ 43,870 $ 43,870 $ 43,870
Present Value Total Costs $ 143,275 $ 40,247.71 $ 36,924.50 $ 33,875.69 $ 31,078.61 $ 285,402
NPV (PV Total Benefits – PV ($ 125,189)
Total Costs)

In reference to the cost benefit analysis conducted, it would be significant to conclude that the
project should not be approved -- the project’s immensely high costs yield a negative NPV, a
negative ROI, and a relatively long break-even point.

Solution:
Development Cost – Personnel
Title Solution Total
System Analyst (2 personnel x $ 50/hour x 400 hours) $40,000
Programmer Analyst (4 personnel x $ 350/hour x 250 hours) $35,000
GIU Designer (1 personnel x $ 40/hour x 200 hours) $8,000
Telecommunications (1 personnel x $ 50/hour x 50 hours) $2,500
$ 94,925
Specialist
System Architect (1 personnel x $ 50/hour x 100 hours) $5,000
Database Specialist (1 personnel x $ 45/hour x 15 hours) $675
System Librarian (1 personnel x $ 15/hour x 250 hours) $3,750
Development Cost – Training
Title Solution Total
Oracle Training (4 students x $3,500/student) $ 14,000 $ 14,000
Registration
 Development Cost – New Hardware and Software
Title Solution Total
Development Server (1 development server x $ 18,700) $ 18,700
Server Software (1 server software x $ 1,500) $ 1,500
DBMS Server (1 server software x $ 7,500) $ 7,500
$ 34,350
Software
DBMS Client (7 client software x $950/client) $ 6,650
Software
TOTAL INITIAL INVESTMENT $ 143,275

Annual Operating Cost – Personnel

Title Solution Total
Programmer Analyst (2 personnel x $ 125/hour x 35 hours) $8,750
$9,050
System Librarian (1 personnel x $ 20/hour x 15 hours) $300
Annual Operating Cost – New Hardware, Software, and Misc.
Title Solution Total
Maintenance (1 maintenance agreement x $ 995) $ 995
Agreement for Server
Maintenance (1 maintenance agreement x $ 525) $ 525
$ 34,820
Agreement for Server
DBMS Software (15,000 forms/year x $ 2.22/form) $ 33,300
Preprinted Forms
TOTAL ANNUAL OPERATING COST $ 43,870

Year Solution Total

1 $ 45,000 / 1.09^1 $ 41,284
2 $ 48,000 / 1.09^2 $ 40,401
3 $ 51,300 / 1.09^3 $ 39,613
4 $ 54,930 / 1.09^4 $ 38,914
PRESENT VALUE TOTAL BENEFITS $ 160,212

Year Solution Total

1 $ 43,870 / 1.09^1 $ 40,247.71
2 $ 43,870 / 1.09^2 $ 36,924.50
3 $ 43,870 / 1.09^3 $ 33,875.69
4 $ 43,870 / 1.09^4 $ 31,078.61
PRESENT VALUE TOTAL COSTS $ 285,402
Formula: Initial Predicted Annual Sales Increase (Previous Expected Annual Sales Increase x 0.10) + 15,000
Year Solution Annual Benefit
1 $ 30,000 sales increase/year + $15,00 savings/year $ 45,000
2 $ 33,000 sales increase/year + $15,00 savings/year $ 48,000
3 $ 36,300 sales increase/year + $15,00 savings/year $ 51,300
4 $ 39,300 sales increase/year + $15,00 savings/year $ 54,930

NPV = TOTAL PRESENT VALUE – TOTAL INITIAL INVESTMENT

NPV = $18,085.34 - $143,275
NPV = ($125,189.66)

ROI = TOTAL CUMULATIVE NET CASH FLOW / TOTAL COST

ROI = -119,525 / 318,755
ROI = 0.3749745
ROI = -37.5%

BREAK-EVEN POINT
BEP = Yearly Net Cash Flow – Cumulative Net Cash Flow / Yearly Net Cash Flow
BEP = ($ 11,060 + $ 119,525) / $ 11,060
BEP = 11.806962 à 14.81