Question

This is the question , honestly , you could skip the garbage at first and jump to the Question section.

IEN 363 Spring 2019 Fnancial Analys1S Assignment ost benefit analysis for the Long Engineering Company The Long Engineering Company (LEC) has decided to install a network system to help their technical support engineers (five of them who earn an average of $100,000 each per year) to deliver better customer service including: mail out sales and other literature, answer phone calls for technical assistance and log and forward repair requests using an alpha-numeric paging system that will be part of the new network system. Currently all company technical manuals and are in physical format hut will need to be scanned and converted to electronic readable form. There are about 3000 pages of technical literature. The initial feasibility study estimated that there would be savings in various areas including: (1) there are currently four clerical staff, two of these would no longer be needed ($60,000 per year each), and (2) Reduced long distance toll bils of $1,500 per month for calls to field support staff regarding repair requests. It was also expected that there would be an increase in sales of $400,000 per year because of improved customer service, with a gross profit rate of 40%. The company typically uses a cost of money (discount rate) of 20% for these types of projects Ten months ago, our company's IT consultant/vendor gave us the following proposal, and we prepared an Excel spreadsheet (see separate handout) showing a Net Present Value of $257,605 for the project: "Our system will provide a full LAN configuration for your customer support ding: call logging by customer or inquirer, recording of nature of request and nature of response, access to all company technical literature online, and automatic message forwarding to hand-held devices of field service persons where necessary. The cost of the system includes the required file server and six workstations, laser printer and WAN communications adapter (S150,000). The software provided will include the necessary LAN operating system (Windows), and applications software to meet the functionality requirements mentioned above (S175,000). Existing staff should be able to handle the new system with additional training, as the entire system will be very user friendly with a low learning curve and should be easily administrated by one of the existing engineers, only absorbing 20% of his time. We do recommend that you budget for at least one week of training for each of your employees each year to gain and maintain the skills necessary to achieve full benefit from this system. It will also be necessary to budget for conversion of the company's technical literature at an estimated cost of $5 per page. A maintenance contract is available if you wish at a cost of 15% of the initial cost of the hardware. and a similar contract is available for the software. Training costs typically amount to $2500 per services area covering the major areas of functionality required inclu week, per employee." uestion The financial situation of the company has changed substantially in the last 10 months, so your manager wants you to make changes to the previous Excel spreadsheet so.as.to present a more conservative analysis by including the following changes 1. Assume that the engineer/supervisor who will be administering the system will have to devote 50% of his time the 1st year, 40% the 2nd year, 30% the 3rd year, and 20% the 4th and 5th years of the analysis. Hint: It is customary in business to allocate the portion of a resource's cost/salary in direct relationship to the % of time it devotes to the project. 2. Assume that the anticipated sales nrease will be only $200,000 the 1st year, $300,000 the 2d year, and $400,000 the remaining 3 years of 3, Assume the gross profit rate will only be 20% throughout the study. 4. If the new Net Present Value (NPV) is negative, your manager wants you to make changes to the software initial cost until the NPV turns to zero (0) for the project. That will indicate the new, lower, price which we may want to negotiate for with the vendor if we don't want to lose money his ntoie

below is my excel sheet , I need to do the 4 requirements under the Question section.

to make your life easier you could copy the numbers from my sheet but i dont know how the function work exactly , as the professor is the one who sets it up.

Answer 1

Ans: Long Engineering Company (LEC)

Basic Information
Gross Profit	20% of sales		Hardware cost	150,000
Supervisisor Salary Alocated			Software Cost	175,000
Year			Data Conversion Cost	15000
1	40%		Engineer Salary	$100,000
2	30%		Training cost per Year	$29,423
3	20%		Discounting Rate	20%
4	20%		Hardware Maintenance	15%
5	20%		Software Maintenance	15%
Incremental sales
1	$200,000
2	$300,000
3	$400,000
4	$400,000
5	$400,000

Computation of Net Present Value
Particulars	Amount ($)
Time ( in years)	0	1	2	3	4	5
Initial Investment
Hardware cost	$150,000
Software Cost	$175,000
Data Conversion Cost	$15,000
Recurring Cost
Hardware Maintenance		$22,500	$22,500	$22,500	$22,500	$22,500
Software Maintenance		$26,250	$26,250	$26,250	$26,250	$26,250
People,Supervisor cost		$40,000	$30,000	$20,000	$20,000	$20,000
Training Cost		$29,423	$29,423	$29,423	$29,423	$29,423
Total Cost	$340,000	$118,173	$108,173	$98,173	$98,173	$98,173
Recurring Benefits
Increased profit		$40,000	$60,000	$80,000	$80,000	$80,000
Wages Saving		$120,000	$120,000	$120,000	$120,000	$120,000
Phone Bill Saving		$18,000	$18,000	$18,000	$18,000	$18,000
Total Benefits		$178,000	$198,000	$218,000	$218,000	$218,000
Incremental Benefits	-$340,000	$59,827	$89,827	$119,827	$119,827	$119,827
Present Value Factor @ 20%	1	0.83	0.69	0.58	0.48	0.40
Present Value	-$340,000	$49,856	$62,380	$69,344	$57,787	$48,156
Net present Value	-$52,477

If Value of the Software is decreased by $52,477 then the NPV become Zero. So the new negotiated Software price is should be $122,523.to accept the project.