Project Evaluation• Identify accurate measures of benefits and costs in monetary
terms and uses ration benefits/costs• Consider a proposed ERP implementation involving a study in year
1 conducted by a team , aided by a consultant• At this stage the expected costs are underestimated• Includes BPR study and formation of training team• Assumes a purchase of $3mn software from a vendor• Int training team to double the payroll cost during year 2• Extra HW in second year• Year 3 internal team with consultant will finish impl.• An extra budget of $500,000 is allowed for extra HW• Training team would grow after the first year• The operations cost of the system budgeted $2mn in Yr 4, growing
at the rate of 10% pa thereafter
ERP Implementation– Cost of capital is 20%– Majority : Benefits expectations: $4mn in Yr 4 and to
last for 7 Yrs– Benefits would grow 30% per year– Conservative estimates: Benefits to be lower after Yr
4, grow by 10% instead of 30%– The firm wants to treat first 3 yrs expenses as
investment
Project Evaluation- Cost Benefit
yearInternal team
Consultants Software hardware Training Benefit
Total Costs
1 500,000 500,000 200,000 01,200,00
0
2 1,000,0001,000,00
03,000,00
0 2,000,000 500,000 07,500,00
0
3 1,500,0001,000,00
0 500,000 2,000,000 05,000,00
0
4 2,000,000 1,000,000 4,000,0003,000,00
0
5 2,200,000 300,000 5,200,0002,500,00
0
6 2,420,000 6,760,0002,420,00
0
7 2,662,000 8,788,0002,662,00
0
8 2,928,200 11,424,4002,928,20
0
9 3,221,020 14,851,7203,221,02
0
10 3,543,122 19,307,2363,543,12
2
ERP Implementation
• Analyze the cost-Benefit sheet and give your comments
• What would be NPV of the project proposal using both the expected rates of benefit growth as shown in the excel sheet ???? And your comments/observation ?
• How much would be the IRR in both the cases ?
• How much would be the payback period in both cases?
