A sale director is deciding whether to implement a new computer-based contact management system. His department has only a few computer, and his sales people are not computer literate. He is aware that computerized sales forces are able to contact more customers and give a higher quality of reliability and service to those customers. They are more able to meet commitments, and can work more efficiently with fulfillment and delivery staff. His financial cost/benefit analysis is shown below:
Costs: New computer equipment:
• 10 network-ready PCs with supporting software @ $2,450 each
• 1 server @ $3,500
• 3 printer @ $1,200 each
• Cabling & Installation @ $4,600
• Sales support software @ $15,000
Training costs:
• Computer introduction- 8 people @ $400 each
• Keyboard skills-8 people @ $400 each
• Sales support system- 12 people @$700 each
Other costs:
• Lost time: 40 man days @ $200/day
• Lost sales through disruption: estimate $20,000
• Lost sales through inefficiency during first months: estimate: $20,000
The benefits of the new system are expected to come from two sources: increased sales and lower inventory levels. Sales are expected to increase by $50,000 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 $10,000 per year for each year of the project’s life. Assuming a three-year useful life after the project is developed.
i. Compute the present values of the cash flows, using an interest rate of 10%.
ii. What is the NPV for this project?
iii. What is the ROI for this project?
iv. What is the break-even point?
v. Should this project be accepted by the approved committee? Why? Why not?