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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

sibility and breakeven chart tabs are

b, we explore and analyze the

as well as the economic feasibility

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

g benefits, we multiply the recurring value of benefits by the present value factor.

he breakeven point SSB is making money.

Amount

Software Licenses

$500,500

Hardware

$75,500

Network and Communications Upgrades

$25,500

Training

$25,500

Configuration and Implementation

$1,750,500

$2,377,500

Recurring Costs

Amount

Software License Maintenance Fees $80,500

New IT Employees (2 x 80,000)

$160,500

$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

$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)

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)

4

5

364,706.72 842,244.97

ue

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.

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