MC's CIO has determined that the up front costs of developing their new Web site will be $54,000. The site will take 6 months to become operational.Once operating, the monthly cost for running the site is $5,000 (this includes hosting fees, data entry, marketing, fulfillment, and a Web master).The company expects the site to result in $6,500 per month in additional after tax revenue.
The cost for the ERP project is $100,000 the first year and $50,000 in years 2 and 3.After year 3 the annual cost of maintaining and upgrading the system will be $40,000.The company expects to begin reaping the benefits of the project in year 2 when it will save $50,000.Beginning in year 3 and continuing into the future the annual projected savings is $90,000.
a. Develop a spreadsheet to perform a cost benefit analysis to determine how much the company will make or lose over the next five years for each project.What is the company's annual return on investment for each project?Based solely on this analysis which project would you recommend?
b. Determine the net present value (NPV) for each project (use a discount rate of 10%). What is the company's annual return on investment?Based solely on this analysis which project would you recommend?How would your analysis change if the discount rate increased to 13%?How would you revise your recommendation?