Problem
Management at Manz Corporation is in the process of determining whether the company should invest in a more sophisticated inventory tracking system that includes programmed reorder points. Although implementing such a system is not inexpensive, in the long run it should be able to reduce their costs and possibly increase their revenues. The outlay for the inventory tracking system is $1,750,000, and the firm expects to reduce its purchasing costs by $150,000, its inventory carrying and reorder costs by $125,000, and for its sales to increase by $175,000 within the first year of implementing the system as a result of fewer stock-outs. By the end of year 2, the firm estimates its purchasing costs to be reduced by $200,000, its inventory carrying and reorder costs to be reduced by $165,000, and its sales to increase by $250,000. By the end of year 3, purchasing costs are expected to be reduced by $225,000, inventory carrying and reorder costs by $195,000, and sales increased by $310,000.
1) What is an ROI model and who uses it?
2) What are some of the benefits of using an ROI model?
3) In the scenario described above, if management of Manz Company required a 36-month payback for the project, would it be funded?