Please see attached file for more data and provide your explanation in the Excel file.
The benefits of the ERP project begin when the system is put into operation. After the initial investment, the following benefits are expected over a 5 year period: reduced inventory costs ($105,000), and reduced administrative costs ($95,000). Software and hardware are depreciated straight line over 3 and 5 years, respectively, with no salvage values. Recurring expenses include the software maintenance and implementation team costs, the latter of which reduce to $30,000 annually after year 0. The company's cost of capital is 10%. The company's required rate of return is 12%. The tax rate is 35%.
ChangePoint has submitted a proposal that seems to meet SightScan's needs. Katie Calson has been asked to:
A) perform a capital budgeting analysis using 3 methods of measuring return on the project. One method must employ net present value analysis. The other two methods should include methods that consider the time value of money. Upon completing the analysis, Katie's (your) report should include an short explanation of each analysis, comments as to whether the methods support each other, a description of some of the intangibles benefits, not captured in the calculations, and your conclusion regarding the ultimate capital budgeting decision.
B) What if Changepoint could offer you full hosted ERP for $65 per user? Discuss how you would evaluate this option to move in the direction of "cloud computing" versus keeping the system in-house. Which elements of your NPV would stay the same, which would change?
The solution provides a capital budgeting project for ChangePoint proposal to SightScan.