Question: Martin is working to develop a preliminary cost benefit analysis

Martin is working to develop a preliminary cost–benefit analysis for a new client-server system. He has identified 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 benefits 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 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 $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 flow, assuming a four-year useful life after the project is developed. Compute the present value of the cash flows, 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?

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