You are a business analyst working for a small business that is considering a project to implement a Customer Relationship Management (CRM) system for use by field sales personnel. The system will use the ACT! software application from Sage Software, Inc. Management has asked you to prepare a preliminary economic feasibility analysis for this proposed project.
The company has nine field sales representatives and one sales manager. The sales representatives and the manager already have desktop computers and Blackberry smartphones with cellular data plans, so these items do not have to be considered in your analysis.
The project requires the purchase of the following:
- Ten copies of the latest version of the Sage ACT! Premium software application (one copy for each of the nine field sales representatives plus an additional copy for the sales manager).
Installation of the software on all 10 desktop PCs will take a computer technician from the companyâ€™s internal IT department two hours to complete. The computer technician earns $20/hour.
All users will attend a one-day (i.e., eight-hour) training class on the ACT! Premium software provided by Real World Training. The cost for the training class is $800 (this is for the entire class, not per person).
After the system is in operation, the company expects to purchase subscriptions to the ACT! Mobile Live service to allow the sales representatives to access their ACT! data through their Blackberry smartphones. A subscription will be required for each of the nine sales representatives (but not for the manager). Each subscription costs $120 per year.
Benefits expected from the system include:
- Earnings from increased sales: $1,500 per year; and
- Cost savings by avoiding hiring a part-time administrative assistant for the sales manager: $2,500 per year.
The project has a five-year time horizon and the company uses a discount rate of 10%.
Upon completing this lab, you will be able to:
- Research and prepare a basic economic feasibility analysis spreadsheet for a project, and interpret the results.
STEP 1: Read and analyze the business case
Carefully read the Scenario/Summary given above and identify the benefits, one-time costs, and recurring costs associated with this proposed project. In your review, make notes on each of the following. These notes will not be turned in, but you will use them in completing the remaining steps in this lab.
- What are the benefits that the company will obtain for each year that the system is in operation?
- What are the one-time costs that the company must pay before putting the new system into operation?
- What are the recurring costs that the company must pay each year that the system is in operation?
STEP 2: Download and open Economic Feasibility Analysis workbook template
Download the file BIS261_W2_iLab_Template.xlsx from the iLab Files area of Doc Sharing, and open it in Microsoft Excel. You will use this Excel workbook to record the results of your research, perform your economic feasibility analysis, and document your conclusions.
STEP 3: Research costs
Select a vendor for the application software needed for the project and determine the costs associated with purchasing this software.
- Do research to identify vendors who supply this application software and their pricing. You may want to do research on the Internet (for example, on the website of the software publisher and other ecommerce sites that sell business software). You may also consider checking with local retailers who sell business software.
- Select a specific vendor to use for a price quotation. You may select the vendor with the lowest price, or you may choose to select a higher-priced vendor if you decide that other factors (such as reliability or convenience) justify the higher cost.
- In the One-Time Costs section of the Quotes worksheet, record the name of the software application under Product or Service. Record a description of the application (including the specific version) under Description. Record the vendor that you selected under Vendor. Record the vendorâ€™s price per copy under Unit Cost. Record the number of copies needed for the project under Quantity.
- Notice that a formula in the worksheet automatically calculates the Extended Cost.
STEP 4: Record additional cost and benefit line items
Record all other cost and benefit items associated with the project on the Quotes worksheet of the Excel workbook, as follows.
- At the top of the worksheet, enter your name for Prepared By and the current date for Date.
- In the Benefits section of the worksheet, for each expected benefit of the project, enter the Benefit Item, How Determined, and the Annual Value. If the annual value of a benefit item was given in the Scenario/Summary, enter Given in scenario in the How Determined column. If you need to perform any research or calculations to determine the Annual Value, use the How Determined column to briefly describe what you did.
- In the One-Time Costs section of the worksheet, for each additional one-time cost item for the project, enter the Product or Service, Description, Vendor, Unit Cost, and Quantity (using the rows below the entry for application software that you made in Step 3). If a service is provided by a company employee rather than purchased from an outside vendor, enter In-house in the Vendor column.
- In the Recurring Costs section of the worksheet, for each recurring cost associated with the project, enter the Cost Item, How Determined, and Annual Value. If the annual value of a cost item was given in the Scenario/Summary, enter Given in scenario in the How Determined column. If you needed to perform any research or calculations to determine the Annual Value, use the How Determined column to briefly describe what you did.
- Notice that formulas in the worksheet automatically calculate the totals for each section.
STEP 5: Perform the Economic Feasibility Analysis
Enter values in the blue-shaded cells in the Analysis worksheet to calculate the Net Present Value (NPV), Return on Investment (ROI), and break-even point for the project, as follows.
- Enter a descriptive name for the project in the cell marked [Enter Project Name Here].
- Enter the discount rate for the project (the discount rate is given in the Scenario/Summary).
- Take the Total Annual Value of Benefits from the Quotes worksheet and, on the Analysis worksheet, enter this value in the Net Economic Benefit row for each year that the project will be in operation (Year 1 through Year 5). Be sure to enter benefit values as positivenumbers.
- Take the Total of One-Time Costs from the Quotes worksheet and, on the Analysis worksheet, enter this value in the One-Time COSTS row under Year 0. Be sure to enter this cost value as a negative number.
- Take the Total Annual Value of Recurring Costs from the Quotes worksheet and, on the Analysis worksheet, enter this value in the Recurring Costs row for each year that the project will be in operation (Year 1 through Year 5). Be sure to enter cost values asnegative numbers.
- Notice that formulas in the worksheet automatically calculate the Overall NPV, Overall ROI, and break-even point for the project.
STEP 6: Document conclusions
On the Conclusions worksheet, write a brief memo (three-to-five paragraphs) to your manager, including the following:
- Enter your name after FROM: and the current date after DATE:;
- Summarize your research findings and the results of your feasibility analysis in narrative form (one or two paragraphs);
- State your own interpretation of these results–what they mean in your own words (one or two paragraphs); and
- Finish with a clear statement of your opinion on whether or not the project is economically feasible for the company, and why (one paragraph).