Project Costs

Initial estimates for project costs are given below. These costs are based on a specific solution option. Alternative options may be considered as part of project Stage 1.

One-off hardware

• Dedicated servers: 35,000
• Workstations: 10,000
• Ethernet, routers and other connections: 20,000
• Printers and scanners: 10,000

Annual software cost (Year 0 onwards)

• ERP software (licence): 45,000
• Server software (including database): 20,000
• Developer software: 25,000

Annual support (Year 1 onwards):

• Software: 11,500
• Hardware: 8,500

One-off development

• ERP software (replaces most existing systems): 100,00
• In-store sales software: 30,000
• Sales forecasting module: 20,000
• E-commerce software (new system, including database and CMS): 105,000
• MSW staff: 100 staff days at an average of 300.0 per day

Annual data cost (Middle of year 0 onwards)

• Geodemographic data: 60,000

Annual staff cost (Year 1 onwards):

• 1 systems manager: 55,000
• systems technicians: 30,000 each

Project benefits

Initial estimates for project financial benefits are:

Increased sales

• Net profit to increase by 150,000 in the calendar year after the system goes live, 350,000 the year after that, and 550,000 each year thereafter.

Reduced costs

• Reduced mail-order and telephone sales should allow MSW to reduce call centre staff by 3 (currently costing 18,000 each per year including overheads) but only after the new system has been running smoothly for 6 months.
• The new system will remove the need for quarterly catalogue production, printing and distribution costs (currently 10,500 per quarter).
• 2 years after web site deployment there will be overall marketing savings to MSW of 12,000 per year.

Business Case

You are required to assess the financial viability of the proposed project using the estimated costs and benefits given above. Assume a discount rate of 5.5%. You must then recommend whether to proceed with the project or not. You should consider how critical the benefit estimate and discount rate values are to your calculation. You might also want to make suggestions for how the profitability of the project could be increased. Assume that the product development takes place throughout the duration of project Year 0. The system will go live at the start of Year 1 and is expected to have a 7-year lifespan.

Calculate NPV