Exercise

Fin$5\mathrm{.}05$ Net Present Value

Use the two projects that were used with the Payback Period and Breakeven

Analysis and are found on other worksheets in this workbook. Determine

the IRR for each. The assumed annual unit sales volume is shown for the

product development project on the line above the value of the sales.

Which has the higher IRR?

Project Estimating & ROI Approval Call Center Upgrade Project

Cost$/$Benefit Category Personnel Purchased Other Total Year $1$ Year $2$ Year $3$ Year $4$ Year $5$ Year $6$ Year $7$ Year $8$

Project Costs

Project Management $ $-$

Project manager for $14$ months $ $(56,000)$ $ $(56,000)$ $ $(48,000)$ $ $(8,000)$

Travel expenses for supplier visits $ $(15,000)$ $ $(15,000)$ $ $(15,000)$

Call Center $ $-$

Project support one person $14$ months $ $(84,000)$ $ $(84,000)$ $ $(72,000)$ $ $(12,000)$

User Testing $3$ people for $2$ months $ $(30,000)$ $ $(30,000)$ $ $(30,000)$

Training of $70$ people $ $(84,000)$ $ $(84,000)$ $ $(84,000)$

IT $ $-$

Requirements definitino $ $(15,000)$ $ $(15,000)$ $ $(15,000)$

System Architecture $ $(75,000)$ $ $(75,000)$ $ $(75,000)$

Unit testing & supplier support $ $(110,000)$ $ $(110,000)$ $ $(110,000)$

System and user testing $ $(155,000)$ $ $(155,000)$ $ $(155,000)$

Hardware Installation $ $(80,000)$ $ $(80,000)$ $ $(80,000)$

Documentation $ $(140,000)$ $ $(140,000)$ $ $(70,000)$ $ $(70,000)$

Purchasing $ $-$

System software suppplier $ $(1,200,000)$ $ $(1,200,000)$ $ $(1,200,000)$

Hardware $ $(70,000)$ $ $(70,000)$ $ $(70,000)$

Oversight and support at #$1,200$ per mo$.$ $ $(16,800)$ $ $(16,800)$ $ $(14,400)$ $ $(2,400)$

Total Project Costs $ $(845,800)$ $ $(1,270,000)$ $ $(15,000)$ $ $(2,130,800)$ $ $(1,769,400)$ $ $(361,400)$ $ $-$ $ $-$ $ $-$ $ $-$ $ $-$ $ $-$

Operating Expenses $-$ Cost & Benefit

Call Center $ $-$

Productivity from reduced errors $ $330,000$ $ $330,000$ $ $275,000$ $ $330,000$ $ $330,000$ $ $330,000$ $ $330,000$ $ $330,000$ $ $330,000$

IT $ $-$

Maintenance $ $96,000$ $ $96,000$ $ $80,000$ $ $96,000$ $ $96,000$ $ $96,000$ $ $96,000$ $ $96,000$ $ $96,000$

Total Operating Expenses $ $330,000$ $ $-$ $ $96,000$ $ $426,000$ $ $-$ $ $355,000$ $ $426,000$ $ $426,000$ $ $426,000$ $ $426,000$ $ $426,000$ $ $426,000$

Sales Impact $-$ Cost & Benefit

New Sales $$1,500,000$ per year $-$ growing $$100,000$ $ $-$ $ $1,250,000$ $ $1,600,000$ $ $1,700,000$ $ $1,800,000$ $ $1,900,000$ $ $2,000,000$ $ $2,100,000$

Variable Cost of New Sales $-$$$900,000$ per year $-$ growing $-$$$60,000$ $ $-$ $ $(750,000)$ $ $(960,000)$ $ $(1,020,000)$ $ $(1,080,000)$ $ $(1,140,000)$ $ $(1,200,000)$ $ $(1,260,000)$

Sales Loss $($negative number$)$ none $ $-$

Variable Cost of Sales Loss $($positive number$)$ $ $-$

Total Sales Impact $ $-$ $ $-$ $ $-$ $ $-$ $ $-$ $ $500,000$ $ $640,000$ $ $680,000$ $ $720,000$ $ $760,000$ $ $800,000$ $ $840,000$

Period total $ $(1,769,400)$ $ $493,600$ $ $1,066,000$ $ $1,106,000$ $ $1,146,000$ $ $1,186,000$ $ $1,226,000$ $ $1,266,000$

Cumulative total $ $(1,769,400)$ $ $(1,275,800)$ $ $(209,800)$ $ $896,200$ $ $2,042,200$ $ $3,228,200$ $ $4,454,200$ $ $5,720,200$

Project Estimating & ROI Approval Product Development Project

Cost$/$Benefit Category Personnel Purchased Other Total Year $1$ Year $2$ Year $3$ Year $4$ Year $5$ Year $6$ Year $7$ Year $8$

Project Costs

Hardware Development $ $(50,000)$ $ $(20,000)$ $ $(70,000)$ $ $(70,000)$

Software Development $ $(95,000)$ $ $(95,000)$ $ $(95,000)$

Prototypes $ $(20,000)$ $ $(35,000)$ $ $(15,000)$ $ $(70,000)$ $ $(70,000)$

Development Testing $ $(65,000)$ $ $(65,000)$ $ $(65,000)$

Qualification Testing $ $(57,000)$ $ $(23,000)$ $ $(80,000)$ $ $(40,000)$ $ $(40,000)$

Tooling & Test Equipment $ $(30,000)$ $ $(60,000)$ $ $(5,000)$ $ $(95,000)$ $ $(95,000)$

Manufacturing Pilot Run $ $(14,000)$ $ $(19,000)$ $ $(33,000)$ $ $(33,000)$

System Upgrades $ $(31,000)$ $ $(31,000)$ $ $(20,000)$ $ $(11,000)$

Advertising Campaign $ $(20,000)$ $ $(45,000)$ $ $(12,000)$ $ $(77,000)$ $ $(53,000)$ $ $(24,000)$

Market Launch $ $(15,000)$ $ $(15,000)$ $ $(15,000)$ $ $(45,000)$ $ $(45,000)$

Total Project Costs $