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Creator

Last Updated

Mayela Fernandez
10/28/2013

Contents
One Time Costs
Recurring Costs
Recurring Benefits
Economic Feasibility
Breakeven Chart
Answers

Purpose
This work book and the contents in it were created to analyze the economic feasibility of a project wh
would replace SSB's existing applications with SAP. The economic feasibility and breakeven chart tabs
both created with an original discount rate of 15%. In the Answers tab, we explore and analyze the
economic feasibility of this project with different discount rates (.30) as well as the economic feasibili
with changes to the net income and inventory holdings costs.

Definitions
One Time Cost - A one time cost is a fixed costs that is only incurred once, which means that they onl
Recurring Cost - Recurring costs are costs that are incurred every year. Although the amount stays th
Recurring Benefits - Recurring benefits are the amount that SSB will be benefiting from the project ev
Breakeven Point - The breakeven point occurs when the overall net present value equals zero. Before

nomic feasibility of a project which


sibility and breakeven chart tabs are
b, we explore and analyze the
as well as the economic feasibility

nce, which means that they only happen once.


r. Although the amount stays the same, the present value of the recurring cost changes every year as the projec
e benefiting from the project every year. To find the present value of the recurring benefits, we multiply the recu
esent value equals zero. Before this point, SSB is not making money, and after the breakeven point SSB is maki

hanges every year as the project goes on.


g benefits, we multiply the recurring value of benefits by the present value factor.
he breakeven point SSB is making money.

One Time Costs


Amount
Software Licenses
$500,500
Hardware
$75,500
Network and Communications Upgrades
$25,500
Training
$25,500
Configuration and Implementation
$1,750,500

Total One Time Costs

$2,377,500

Recurring Costs
Amount
Software License Maintenance Fees $80,500
New IT Employees (2 x 80,000)
$160,500

Total Recurring Costs

$241,000

Recurring Benefits
Amount
Increased Profit Due to Increased Sales
$750,500
Reduced Inventory Holdings Costs
$250,500
Reduction in Clerical Workforce (4 x 50,000 $200,500

Total Recurring Benefits

$1,201,500

Discount Rate

Benefits
Recurring Benefits
Present Value Factor
Present Value of Benefits
Net Present Value of Benefits

0.15

0
1
2
0
1,201,500
1,201,500
1 0.8695652174 0.7561436673
0 1,044,782.61
908,506.62
0 1,044,782.61
1,953,289.22

Costs
One Time Cost
2,377,500.00
0
0
Recurring Costs
0
241,000
241,000
Present Value Factor
0.8695652174 0.7561436673
Present Value of the Recurring Costs
209,565.22
182,230.62
Net Present Value of the Costs
2,377,500.00
2,587,065.22
2,769,295.84
Overall Net Present Value

(2,377,500.00) (1,542,282.61)

(816,006.62)

year
3
4
5
Total
1,201,500
1,201,500
1,201,500
0.6575162324 0.5717532456 0.4971767353
790,005.75
686,961.52
597,357.85
2,743,294.98 3,430,256.50 4,027,614.35 4,027,614.35

0
0
0
241,000
241,000
241,000
0.6575162324 0.5717532456 0.4971767353
158,461.41
137,792.53
119,819.59
807,869.38
2,927,757.25 3,065,549.79 3,185,369.38 3,185,369.38
(184,462.28)

364,706.72

842,244.97

Year
0
1
2
3
Overall Net Present Value (2,377,500.00) (1,542,282.61) (816,006.62) (184,462.28)

Overall Net Present Value


1,500,000.00
1,000,000.00
500,000.00
(500,000.00) 0
(1,000,000.00)
(1,500,000.00)
(2,000,000.00)
(2,500,000.00)
(3,000,000.00)

Overall Net Presen

4
5
364,706.72 842,244.97

ue

Overall Net Present Value

1. Assume a discount rate of 15%. What is the overall net present value for the project? When wil
project and proceed with implementing SAP? Explai
The overall net present value for the project at the end of year 5 is 842244.972. The project will brea
with the project and proceed with implementing SAP.

2. Assume a discount rate of 30%. What is the overall net present value for the project? When wil
project and proceed with implementing SAP? Explai
The overall net present value for the project at the end of year 5 is -38135.253. The project will not b
with the project and not continue implementing SAP.

3. Assume the recurring value of the benefits due to increased sales was overly optimistic and ne
$750,500. In addition, assume the benefits due to a reduction in inventory holding costs are only $5
what is the overall net present value for the project? When will the project break-even? Should SSB
SAP? Explain your answer.
At the end of year 5 with a 15% discount rate the overall net present value is -1085244.21. The proje
definitely not go forward with the project and not proceed with implementing SAP because the projec
breaks even the software will most likely be outdated).

4 Assume the recurring value of the benefits due to increased sales was overly optimistic and net
$750,500. In addition, assume the benefits due to a reduction in inventory holding costs are only
project economically feasible? Should SSB move forward with the project and proceed with impleme
the economic feasibility of the project? Explain y

Because of the massive decrease of inventory holding costs going from 250,500 to 50,500 and the ch
discount rate at which SSB could breakeven within five years is -.20 (there is no valid discount rate th
not move forward with the project and should not proceed with implementing SAP. The negative disco
only be managed with a large amount of sales, which SSB did not have in this case.

ue for the project? When will the project break-even? Should SSB move forward with the
h implementing SAP? Explain your answer.
44.972. The project will breakeven at the beginning of year 3, so SSB should move forward

ue for the project? When will the project break-even? Should SSB move forward with the
h implementing SAP? Explain your answer.
35.253. The project will not breakeven until after year five, so SSB should NOT go forward

was overly optimistic and net income due to increased sales is only $375,500 instead of
tory holding costs are only $50,500 instead of $250,500. Assuming a discount rate of 15%,
ect break-even? Should SSB move forward with the project and proceed with implementing
P? Explain your answer.
ue is -1085244.21. The project will not breakeven until the end of year 19, so SSB should
nting SAP because the project only has a 5 year expectancy (by the time the project finally

was overly optimistic and net income due to increased sales is only $375,500 instead of
entory holding costs are only $50,500 instead of $250,500. At what discount rate is the
ct and proceed with implementing SAP? What are the implications of this change in sales to
ility of the project? Explain your answer.

250,500 to 50,500 and the change in sales/net income, the only economically feasible
re is no valid discount rate that will be available-the project will not breakeven). SSB should
nting SAP. The negative discount rate shows that the project is not all that feasible and can
n this case.