Question

Part 2: Cost Benefit Analysis

Assumptions

• In order to simplify the cost benefit analysis, we will not make a net present value calculation for each cost and income.

• Please report all calculations in yearly terms

• Please calculate the cost benefit over a 5 year term

Instructions

• Please create a table that lays out the project cost and benefits (15)

• Please create a table that shows the cost over 5 years (5)

• Please create a table that shows the benefit over 5 years (5)

• Please create a table that compares the costs and benefits (5)

• Which option should Contoso go with? (5)

Company A ERP Implementation Project 1

– Will be implemented on site at the Contoso head office. Will require the purchasing of $150,000 of hardware in order to operate properly.

– The software has a yearly license cost of $50,000 with no user limits

– Company A will be on site at Contoso HQ to install and configure the ERP for 8 weeks for $30,000

– Contoso has also decided to bring in a Company A organizational change consultant for the same 8 week duration as the install to help ensure people are embracing the change the ERP is brining. This costs $20,000

– Company A has also suggested that other customers budget $10,000 a year for miscellaneous maintenance

– It is expected that with Company A’s ERP there would be a decrease in the number of HR people needed. This is expected to be a savings of $150,000 a year

– It is expected that with Company A’s ERP will greatly improve demand forecasting. This should reduce carrying costs significantly. This is expected to be a savings of $1,000,000/year

– Through overall efficiencies and improvements effectively utilizing Company A’s ERP Contoso is expected to expand revenue by $3,000,000/year

ERP Implementation Project 2

– Implementation will take place in the cloud and is offered as Software as a service. So there is no explicit hardware costs however there is a licensing fee of $200/user/month to access the service.

– Contoso is expected to need an average of 100 people licensed for the ERP solution

– In order to improve the response time of the solution, Contoso would have to upgrade its internet connection which would cost $1200/month.

– It is expected that with Company B’s ERP Warehousing software Contoso will be able to use one less warehouse. This is expected to be a savings of $1,500,000/year.

– It is expected that with Company B’s ERP Warehousing software Contoso will be able to use 3 fewer accountants. This is expected to be a savings of $250,000/year.

– Through overall efficiencies and improvements effectively utilizing Company B’s ERP Contoso is expected to expand revenue by $2,750,000

This is the scenario that I posted above in instruction 2 I am confused because it needs to analyze the cost over 5 years, the solution that is provided on Chegg for the instruction 2 in a bit confusing because it has to calculate yearly cost but for the internet connection fees it is given monthly $1200 which should be calculated yearly but in the solution that is provided is calculated $1200 yearly how that can come because it is monthly. Note: Please check the bold area in the above text.

Answer 1

Solution:-

For Project 1 - Cost And Benefits

Year	0	1	2	3	4	5	Total
Intial project cost	-$1,50,000						-$1,50,000
Yearly License Cost		-$50,000	-$50,000	-$50,000	-$50,000	-$50,000	-$2,50,000
Installation Fees in Year 1		-$30,000	$0	$0	$0	$0	-$30,000
Consultant Fees in Year 1		-$20,000	$0	$0	$0	$0	-$20,000
Miscellaneous maintenance		-$10,000	-$10,000	-$10,000	-$10,000	-$10,000	-$50,000
Total Cost (A)	-$1,50,000	-$1,10,000	-$60,000	-$60,000	-$60,000	-$60,000	-$5,00,000
Saving in HR Cost		$1,50,000	$1,50,000	$1,50,000	$1,50,000	$1,50,000	$7,50,000
Saving In Carrying Cost		$10,00,000	$10,00,000	$10,00,000	$10,00,000	$10,00,000	$50,00,000
Expansion In revenue		$30,00,000	$30,00,000	$30,00,000	$30,00,000	$30,00,000	$1,50,00,000
Total Benefits (B)	$0	$41,50,000	$41,50,000	$41,50,000	$41,50,000	$41,50,000	$2,07,50,000
Net Benfit (B-A)	-$1,50,000	$40,40,000	$40,90,000	$40,90,000	$40,90,000	$40,90,000	$2,02,50,000

For Project 2 - Cost and Benefits

Year	0	1	2	3	4	5	Total
Intial project cost							$0
Yearly License Cost( $200*100 Users*12 month)		-$2,40,000	-$2,40,000	-$2,40,000	-$2,40,000	-$2,40,000	-$12,00,000
Internet upgradation Cost ($1200*12month)		-$14,400	-$14,400	-$14,400	-$14,400	-$14,400	-$72,000
							$0
							$0
Total Cost (A)	$0	-$2,54,400	-$2,54,400	-$2,54,400	-$2,54,400	-$2,54,400	-$12,72,000
Warehouse Cost Saving		$15,00,000	$15,00,000	$15,00,000	$15,00,000	$15,00,000	$75,00,000
Accountatnts Salary Saving		$2,50,000	$2,50,000	$2,50,000	$2,50,000	$2,50,000	$12,50,000
Revenue Expansion		$27,50,000	$27,50,000	$27,50,000	$27,50,000	$27,50,000	$1,37,50,000
Total Benefits (B)	$0	$45,00,000	$45,00,000	$45,00,000	$45,00,000	$45,00,000	$2,25,00,000
Net Benfit (B-A)	$0	$42,45,600	$42,45,600	$42,45,600	$42,45,600	$42,45,600	$2,12,28,000

Since Total Net Benefit in option 1 is $20,250,000 and option 2 is $21,228,000
Hence Option 2 is better and should be chosen