Martin is working to develop a preliminary cost–bene?t analysis for a new client-server system. He has identi?ed a number of cost factors and values for the new system, summarized in the following tables:
Development Costs—Personnel 2 Systems Analysts 400 hours/ea @ $50/hour 4 Programmer Analysts 250 hours/ea @ $35/hour 1 GUI Designer 200 hours/ea @ $40/hour 1 Telecommunications Specialist 50 hours/ea @ $50/hour 1 System Architect 100 hours/ea @ $50/hour
1 Database Specialist 15 hours/ea @ $45/hour 1 System Librarian 250 hours/ea @ $15/hour Development Costs—Training 4 Oracle training registration $3500/student Development Costs—New Hardware and Software 1 Development server $18,700 1 Server software (OS, misc.) $1500 1 DBMS server software $7500 7 DBMS client software $950/client Annual Operating Costs—Personnel 2 Programmer Analysts 125 hours/ea @ $35/hour 1 System Librarian 20 hours/ea @ $15/hour Annual Operating Costs—Hardware, Software, and Misc. 1 Maintenance agreement for server $995 1 Maintenance agreement for server $525 DBMS software Preprinted forms 15,000/year @ $.22/form
The bene?ts of the new system are expected to come from two sources: increased sales and lower inventory levels. Sales are expected to increase by $30,000 in the ?rst 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. Using a format similar to the spreadsheets in this chapter, develop a spreadsheet that summarizes this project’s cash ?ow, assuming a four-year useful life after the project is developed. Compute the present value of the cash ?ows, using an interest rate of 9%. What is the NPV for this project? What is the ROI for this project? What is the break-even point? Should this project be accepted by the approval committee?