Whirlpool Europe - NPV AnalysisCost of Capital 0.09

1999 2000 2001 2002 2003 2004COSTS (in Millions)Cap. Equipment 4.3 8.6 6.9 4.1 Software Licences 0.6 0.3 Consulting Cost 3.5 1.7 1.3 0.7 Employee Cost (200 employees, avg. salary=45K) 2.3 4.5 6.8 9.0 Task force cost 0.3 0.6 0.6 0.6 0.3 Maintenance Expense 0.6 1.2 1.8 2.4 3.0 3.0 Licence Maintenance Fee 0.1 0.2 0.3 0.4 0.4 TOTAL 11.3 16.7 17.5 17.1 4.0 3.7 NPV 10.3 14.0 13.5 12.1 2.6 2.2 NPV of COSTS 54.9

SAVINGS (in Milions)Inventory Savings 3.7 8.6 10.1 6.7 3.8 Revenue and Margin Improvements 0.9 1.8 4.0 6.8 9.9 Other Expense Savings 0.6 1.7 2.5 3.3 3.4 TOTAL 0.0 5.2 12.1 16.7 16.8 17.1 NPV 0.0 4.4 9.4 11.8 10.9 10.2 NPV of BENEFITS 46.6

NET NPV (in Millions) (8.2)

Key Factors to Manipulate AssumptionsAvg salary/employee 45,000 Employee cost: average salary per employee (involved in implementation) =100k Number of participating Employees 200 Number of participating employees: 50 employees per each of the 4 waves.Months in a year 12 Cost per consultant per month 15,400 Consulting Cost: 15,400 per month (per consultant) as stated in case.

Avg fee/consultant (per annum) 184,800

Number of Consultants - 19

2000 9

2001 7

2002 4 Benefits adjustment factor 1.00

INTERMEDIATE CALCULATIONS

Calculations for revenue margin improvementsDue to ERP implementation,

A) the profit margin improves (.25% or .0025 by the second year after implementation, refer page 3 and exhibit 5) and

First of all we find out the avg. price of productsProduct Price ExplanationTot. Rev. (1997) - all regions 1,227,859,000 Adding revenues from all the regions (exhibit 5)Tot. Units Sold (1997) - all regions 6,107,909 Adding units sold in all the regions (exhibit 4)Avg. Price per Unit (1997) - all regions 201 Arrived at the average price by dividing total revenue by total units sold.

Assumptions regarding Exhibit 4:Assumption: projected/targeted availability=92%, Total desired/expected increase will occur between 2000 and 2005.

Note 2: The additional availability will be cummulative. I.e year 2 will have increase= increase in year 1 + increase in year 2

Product Availability (in 000's) Percentage Availability Improvement by WaveProd. Avail. 1997 2000 2001 2002 2003 2004

West 73.5 0.25 0.4 0.35South 83.1 0.35 0.4 0.25Central 76.8 0.4 0.4 0.2North 83.2 0.4 0.4

B) the product availability will improve (projected/targeted availability=92%) and 25% of increase in availability will be converted into sales (refer page 3 and exhibit 4).

To find out the the additional revenues due to ERP implementation, we need to find out: ( Assumption is that without ERP implementation, total units sold in future would have been constant i.e at the same level)

1) additional revenue due to increase in profit margin - to calculate this, multiply "increase in profit margin" by the "number of units sold at present" (i.e. before ERP implementation)

2) Revenue coming from additional sales of products - to calculate this, multiply"the number of additional units sold" by the "profit margin"

(This assumption should not make a difference in the analysis as this avg. price has been used later to forecast the aggregate revenues.)

E.g. for region "west" the additional % increase over next 5 years will be (92-73.5)= 18.5%. Now, in 2000, we achieve 25% of this 18.5. Therefore, expected % increase in availability (.25*18.5) = 4.625%. This percentage is multiplied by the "current number of units sold" to arrive at the increased availability in terms of number of units.

Assuming that we can sell 25% of this additional product, we multiply the units obtained (from previous calculation) by the average price of product (calculated above) to arrive at the additional revenue from increased sales (due to increased availability)

Note: Alternative method to find the profits due to additional sales: We can instead of calculating average price, use the unit profit margin figures (exhibit 4) along with margin improvement figures (exhibit 5). This would be a little more complex/complicated but I think it would be a better way to deal with the problem. Comments???

Additional product availableTotal expected % increase in availability Units sold in 1997 2000 2001 2002 2003 2004

18.5 2,271,139 105,040 168,064 147,056 0 0 8.90000000000001 1,415,949 0 44,107 50,408 31,505 0

15.2 977,665 0 0 59,442 59,442 29,721 8.8 1,443,156 0 0 0 50,799 50,799

(Cumulative) Additional product available2000 2001 2002 2003 2004

105,040 273,104 420,161 420,161 420,161 0 44,107 94,515 126,019 126,019 0 0 59,442 118,884 148,605 0 0 0 50,799 101,598

(Cumulative) Additional product SOLD2000 2001 2002 2003 2004

26,260 68,276 105,040 105,040 105,040 0 11,027 23,629 31,505 31,505 0 0 14,861 29,721 37,151 0 0 0 12,700 25,400

Addition Revenue from Increased Availability2000 2001 2002 2003 2004

$5,278,997 $13,725,392 $21,115,987 $21,115,987 $21,115,987$0 $2,216,673 $4,750,013 $6,333,351 $6,333,351$0 $0 $2,987,374 $5,974,748 $7,468,435$0 $0 $0 $2,553,006 $5,106,013

Profit Margin ImprovementProfit Margin 1997 2000 2001 2002 2003 2004

Profit Margin West 0.12 0.0006 0.0025 0.0025 0.0025 0.0025South 0.16 0.001 0.0025 0.0025 0.0025Central 0.24 0.0013 0.0025 0.0025North 0.11 0.0013 0.0025

Additional Profit from Incr.Avail. (taking into account the increase in profit margins)2000 2001 2002 2003 2004

$636,647.02 $42,548.71 $105,579.94 $105,579.94 $105,579.94$0.00 $2,216.67 $16,625.05 $31,666.76 $31,666.76$0.00 $0.00 $3,883.59 $22,704.04 $37,342.17$0.00 $0.00 $0.00 $3,318.91 $19,402.85

Total {A} $636,647.02 $44,765.39 $126,088.57 $163,269.64 $193,991.72

Assumption: The margin improvement percentages (exhibit 5) are absolute increments (I.e not as a percentage of current margin percentage). For example, if current margin is 12% and improvement in 2000 is .06%, we have assumed that total profit margin in 2000 would be 12.06%

Assumption: Every year, the "current revenue" is multiplied by the "cumulative incremental margin" to arrive at the additional profits on the base revenue/(units sold)Profit Margin Improvement

Revenue 1997 2000 2001 2002 2003 2004West $477,784,000 0.0006 0.0025 0.0025 0.0025 0.0025South $283,549,000 0.001 0.0025 0.0025 0.0025Central $185,625,000 0.0013 0.0025 0.0025North $280,901,000 0.0013 0.0025

Addition Profit from Increased Profit Margin on the existing (base) sales2000 2001 2002 2003 2004

$286,670 $1,481,130 $2,675,590 $3,870,050 $5,064,510$0 $283,549 $992,422 $1,701,294 $2,410,167$0 $0 $241,313 $705,375 $1,169,438$0 $0 $0 $365,171 $1,067,424

Total {B} $286,670 $1,764,679 $3,909,324 $6,641,891 $9,711,538

Total Add. Profit {A} + {B} $923,317.42 $1,809,444.79 $4,035,412.97 $6,805,160.34 $9,905,529.92In Millions $1 $2 $4 $7 $10

Calculations for Inventory Savings:In the case, Aggregate inventory savings has been projected to be $34.3 M(pg. 3)

Acc. to our calculations the total inventory savings would be $ 32.9 M

Inventory Savings (in 000's) 2000 2001 2002 2003 2004Projected Improvement of DSI (days) Inventory Value per Day (1997) Improv. In DSI

West 12 1221 3 4.8 4.2South 12 653 4.2 4.8 3Central 12 389 4.8 4.8 2.4North 12 594 4.8 4.8Cummulative Savings $3,663 $8,603 $10,130 $6,677 $3,785 In Millions $4 $9 $10 $7 $4

Total units soldwest 2,271,139 south 1,415,949 central 977,665 north 1,443,156 Total units sold 6,107,909 Cost Savings by Region

South Central North Sum Plus 75% other* Total2000 $0.00 $0.00 $0.00 $0.00 $ 450,000 $450,0002001 $285,769.87 $0.00 $0.00 $285,769.87 $ 1,275,000 $1,560,7702002 $1,009,051.35 $245,200.89 $0.00 $1,254,252.23 $ 1,875,000 $3,129,252

0.75 2003 $1,732,963.76 $728,083.84 $368,495.01 $2,829,542.61 $ 2,475,000 $5,304,5432004 $2,441,833.26 $1,206,782.07 $1,090,611.45 $4,739,226.78 $ 2,550,000 $7,289,227

We have used exhibit 3 to support this projection. Explanation: DSI will improve by 12 days in all the regions. However this reduction will occur in phases. In 2000 there will be 3 days reduction (I.e. 20% improvement).

We multiply Inventory value per day (i.e. 1221) with the number of days saved and thus arrive at the savings in that region, for that year. Finally adding the savings from all the regions we get the total savings for that year.

*Cost savings for South Central North for OPM analysis. Assume that 75% of other savings in case occurs in these three regtionsCalculated as {A}+{B}+ inventory savings

Black Scholes Model for Real IT Options Applied to Whirlpool CasePilot in West, buying an option to implement in other 3 regions

w(x,t) value of project whose underlying riskyasset is the expected revenues from the projectx at time t

c is the exercise price= IT investment

x is expected revenues from the projectAssume benefits as listed below starting in one year. Managers have said to use20% as the range around the expected return to get best and worst case estimates

r is compounded risk-free interest rate (T-bill rate) Rate is each year's benefit/costs in table below. We % range ofsum the variance of each year's estimates to estimate sigma squared. returns 20%

t*-t is duration of the optionBenefits of exercising option Returns based on best, expected and worst case estimates by management; computations based on %

sigma -squared is the variance in the expected to implement in 3 regions Expected Worst Best Rate/return-exp Rate/return wrst Rate/return-bst Variancereturn from the project 1999 - - - 0

2000 5,186,317 4,149,054 6,223,581 0.31 0.25 0.37 0.004 (1) w(x,t) = xN(d1)-c e(exp(-r(t*-t))N(d2) 2001 12,112,845 9,690,276 14,535,414 0.69 0.55 0.83 0.019 N is cumulative normal density function 2002 16,665,213 13,332,170 19,998,256 0.97 0.78 1.17 0.038

2003 16,782,560 13,426,048 20,139,072 4.20 3.36 5.03 0.704 (2) d1= (ln(x/c)+(r+0.5 sigma-squared)(t*-t))/(sigma(sqrt(t*-t)) 2004 17,090,330 13,672,264 20,508,396 4.62 3.70 5.54 0.853

50,818,561 40,654,849 60,982,274 1.09 0.87 1.31 0.05 NPV in 2000 (Expected) NPV in 2000 (Worst) NPV in 2000 (Best) NPV(2000)/Exp.NPV(1 NPV(2000)/NPV(1999) NPV(2000)/NPV(1999)

Expected NPV(1999), assuming 3 scenarios equally probable 46,622,533$50,818,561

(3) d2=(ln(x/c) + (r-0.5 sigma-squared)(t*-t))/(sigma(sqrt(t*-t)) sigma-squared 0.05 0.048 sigma 0.218 0.218

% of original costsNPV of costs c 54,851,092 100%

Costs Wksht1* Cost incurred 1999 11,261,200 11,261,200

r 0.04 2000 16,663,200 16,663,200 discount rate 0.09 2001 17,543,600 17,543,600

Option duration t*-t 1 2002 17,139,200 17,139,200 2003 4,000,000 4,000,000 2004 3,700,000 3,700,000

NPV costs $54,851,092

Computations(2) d1= (ln(x/c)+(r+0.5 sigma-squared)(t*-t))/(sigma(sqrt(t*-t)) d1 (0.06) Estimated Costs

(3) d2=(ln(x/c) + (r-0.5 sigma-squared)(t*-t))/(sigma(sqrt(t*-t)) d2 (0.28)1999 2000 2001 2002 2003

(1) w(x,t) = xN(d1)-c e(exp(-r(t*-t))N(d2) w(x,t) Value of the option 3,613,788 0 5,186,317 12,112,845 16,665,213 16,782,560 Savings from Worksheet 1

NPV 2000-2004 x =expected value of returns

200417,090,330