Cost Benefit Analysis

First, study the following PPT on financial analysis (NPV, ROI, etc..)

Tilley11e_PPT_TKC.pptx

Download Tilley11e_PPT_TKC.pptx

Then work on the following problems:

In Chapter 6, you learned that Campus Bikes is a popular bicycle shop located near a major university. The shop sells several brands of new bikes, including everything from high-end racing models to beach cruisers. In addition to sales of new bikes and accessories, Mark’s service department is always busy. The staff includes Mark himself, a bookkeeper, two part-time sales reps, a full-time mechanic, and several part-time service helpers who assemble bikes.

Background

Until now, the owner, Mark Turner, kept the business records on his personal computer. He created a simple database to keep track of inventory, but it is not always up-to-date. He also developed spreadsheets to track expenses and payroll. The business has grown and Mark wants to install a new computer system to handle all business functions.

You are a lab assistant in the computer information department at the college. You earned a computer science degree at a two-year school, and you recently decided to work toward your four-year degree. Mark recently asked you to help him plan a system for Campus Bikes. You used an object-oriented approach to create a model of the business functions and actors involved.

Now Mark wants you to do a “make or buy” analysis. Specifically, you will look into the pros and cons of in-house development versus purchase of a software package. Your research indicates that the most popular bike shop package is offered by a vendor called BikeData.

In your last meeting, Mark said that tangible savings for a new system would be hard to measure, but improved customer care, better service department records, and increased productivity are expected. Mark estimates that these benefits will add up to about $3,000 per year, whether the system is developed in-house, or purchased from BikeData.

You decide to compare relative costs to establish a total cost of ownership (TOC) over the useful life of the system. Based on your research, you put together the following summary:

Costs for Option A: Develop In-house

• The system will have a six-year useful life, be very flexible, and easiest to maintain.
• It will cost $15,000 to develop, install, and configure the system, and $1,000 to load

existing data.

• Mark and the bookkeeper can handle day-to-day support with no added expense.

Costs for Option B: Purchase BikeData Software Package

• This is a vertical package with a four-year useful life.
• The software is less flexible than an in-house system and some customizing will be needed.
• It will cost $8,000 to purchase, $1,500 to install and configure, $2,500 to load existing

data, and $1,000 additional hardware will be needed

• Support is free for the first year, then there is a $2,000 annual fee

Benefits for Both Options: $3,000 per year

Tasks

1. Prepare a detailed list of pros and cons of in-house versus software purchase.
2. Calculate ROI for both options.
3. Calculate NPV for both options. Use an 8% discount factor.
   The present value formula is PV = FV/(1 + i) n where PV = present value, FV = future value, i = decimalized interest rate, and n = number of periods.
4. Create a PowerPoint presentation for Mark showing the results of your analysis, including recommendations and reasons.

Name your file in the following format [Assignment_Cost_Benefit_Analysis]_[YourFirstName]_[YourLastName]. (e.g. Assignment_Cost_Benefit_Analysis_Bob_Lee). Submit a PPT file with answers to the questions before the due date.

Please review the PPT on Financial Analysis Tools as it contains detailed information on how to do the tasks. The following is an example on a similar case that you can refer to:

chapter07_solutions.docx