Question

1. ABC Inc. wishes to assess the economic feasibility (also called cost-benefit analysis or business case) of a new order processing system proposed by the MIS department. It is expected that the proposed order processing system will reduce the order processing cycle time, i.e. the average duration between the day the order is placed to the day the material is delivered to the customer, from 15 days to 9 days. a. According to the marketing department of ABC Inc. the reduced order execution time will increase their sales by 15% for the next 5 years. Taking in consideration that the current annual sales of ABC Inc. is $10 million, and profit margin is 10%, calculate the cash benefits in the next 5 years due to increased sale. Calculate the NPV (Net Present Value) of this benefit (discounted at 6% per annum). b. Costs include a one-time cost of software development of $600000, recurring annual software maintenance cost of $5000, recurring annual maintenance costs of $2,000 and recurring annual costs of parts and consumables worth $3000. Calculate the NPV (at 6%) of all costs. c. Recommend if the proposed order processing system is feasible

          1. ABC Inc. wishes to assess the economic feasibility (also called cost-benefit analysis or business case) of a new order processing system proposed by the MIS department. It is expected that the proposed order processing system will reduce the order processing cycle time, i.e. the average duration between the day the order is placed to the day the material is delivered to the customer, from 15 days to 9 days.
a. According to the marketing department of ABC Inc. the reduced order execution time will increase their sales by 15% for the next 5 years. Taking in consideration that the current annual sales of ABC Inc. is $10 million, and profit margin is 10%, calculate the cash benefits in the next 5 years due to increased sale. Calculate the NPV (Net Present Value) of this benefit (discounted at 6% per annum).
b. Costs include a one-time cost of software development of $600000, recurring annual software maintenance cost of $5000, recurring annual maintenance costs of $2,000 and recurring annual costs of parts and consumables worth $3000. Calculate the NPV (at 6%) of all costs.
c. Recommend if the proposed order processing system is feasible

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1. ABC Inc. wishes to assess the economic feasibility (also called cost-benefit analysis or business case) of a new order processing system proposed by the MIS department. It is expected that the proposed order processing system will reduce the order processing cycle time, i.e. the average duration between the day the order is placed to the day the material is delivered to the customer, from 15 days to 9 days.
a. According to the marketing department of ABC Inc. the reduced order execution time will increase their sales by 15% for the next 5 years. Taking in consideration that the current annual sales of ABC Inc. is $10 million, and profit margin is 10%, calculate the cash benefits in the next 5 years due to increased sale. Calculate the NPV (Net Present Value) of this benefit (discounted at 6% per annum).
b. Costs include a one-time cost of software development of 600000, recurring annual software maintenance cost of5000, recurring annual maintenance costs of 2,000 and recurring annual costs of parts and consumables worth3000. Calculate the NPV (at 6%) of all costs.
c. Recommend if the proposed order processing system is feasible

Added by Jason B.

Computer Science and Information Technology

Trishna Knowledge Systems 2018 Edition

Instant Answer

Solved by Expert Akash M

08/13/2023

Step 1

5 million Annual profit increase = $1.5 million * 10% = $150,000 Total profit increase over 5 years = $150,000 * 5 = $750,000 Show more…

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ABC Inc. wishes to assess the economic feasibility (also called cost-benefit analysis or business case) of a new order processing system proposed by the MIS department. It is expected that the proposed order processing system will reduce the order processing cycle time, i.e. the average duration between the day the order is placed to the day the material is delivered to the customer, from 15 days to 9 days. a. According to the marketing department of ABC Inc. the reduced order execution time will increase their sales by 15% for the next 5 years. Taking in consideration that the current annual sales of ABC Inc. is $10 million, and profit margin is 10%, calculate the cash benefits in the next 5 years due to increased sale. Calculate the NPV (Net Present Value) of this benefit (discounted at 6% per annum). b. Costs include a one-time cost of software development of $600000, recurring annual software maintenance cost of $5000, recurring annual maintenance costs of $2,000 and recurring annual costs of parts and consumables worth $3000. Calculate the NPV (at 6%) of all costs. c. Recommend if the proposed order processing system is feasible l. ABC Inc. wishes to assess the economic feasibility (also called cost-benefit analysis or business case) of a new order processing system proposed by the MIS department. It is expected that the proposed order processing system will reduce the order processing cycle time, i.e. the average duration between the day the order is placed to the day the material is delivered to the customer, from 15 days to 9 days a. According to the marketing department of ABC Inc. the reduced order execution time will increase their sales by 15% for the next 5 years. Taking in consideration that the current annual sales of ABC Inc. is $10 million, and profit margin is 10 %, calculate the cash benefits in the next 5 years due to increased sale. Calculate the NPV (Net Present Value) of this benefit (discounted at 6% per annum). b. Costs include a one-time cost of software development of $600000, recurring annual software maintenance cost of $5000, recurring annual maintenance costs of $2,000 and recurring annual costs of parts and consumables worth $3000. Calculate the NPV (at 6%) of all costs. c. Recommend if the proposed order processing system is feasible

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Transcript

00:01 Calculate the ntd of the project.

00:04 So for this we need to calculate the different things number 1 annual cash flow for year 1 there is revenue we have to given the cash flow is 1 crore euro minus 50 lakh euro minus 1 10 lakh euro.

00:36 So here we got 40 lakh now for year 2 and 3 cash flow will be 1 crore euro minus again 50 lakh euro minus 10 lakh euro.

01:10 So here we got 40 lakh euro.

01:15 So now second thing we need to calculate the npv calculation.

01:19 So the formula we can use is let's plug the values 40 lakh cf1 cash flow for first year 1 plus r which is 0 .10 to the power 1 plus cf2 which is 40 lakh euro divided by 1 plus r 0 .10 to the power 2 plus cf3 which is again 40 lakh divided by 1 plus 0 .10 to the power 3 minus initial investment, which is 90 lakh.

02:08 So here we got after calculation.

02:12 This is this is the thing now the third we need to calculate the networking capital calculation.

02:19 So for year 1 it will be 10 lakh plus 5 lakh plus 20 lakh euro minus 5 lakh euro.

02:47 So here we got 3 lakh euro for year 2 and year 3 it will be same.

03:00 This is 30 lakh euro.

03:04 30 lakh.

03:05 This is also 30 lakh euro.

03:09 Now, let's move towards the annual fourth is annual change in networking capital and wc.

03:21 So here for year 1 it will be 3 lakh euro minus 30 lakh euro minus 30 lakh euro.

03:35 So here we got 0 euro for year 2 and 3 the process is same.

03:41 So here it is also 0 euro now after tax calculation with this after tax cash flow.

03:54 So here it is for 40 lakh minus 2 lakh euro.

04:06 So this is we got 38 lakh euro now 6 days upload npv calculation...

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