Reference no: EM131017616

The Decker Company maintains a fleet of 10 service trucks and crews that provide a variety of plumbing, heating, and cooling repair services to residential customers. Currently, it takes on average about 6 hours before a service team responds to a service request. Each truck and crew averages 12 service calls per week, and the average revenue earned per service call is $150. Each truck is in service 50 weeks per year. Due to the difficulty in scheduling and routing, there is considerable slack time for each truck and crew during a typical week. In an effort to more efficiently schedule the trucks and crews and improve their productivity, Decker management is evaluating the purchase of a prewritten routing and scheduling software package. The benefits of the system will include reduced response time to service requests and more productive service teams, but management is having trouble quantifying these benefits. One approach is to make an estimate of how much service response time will decrease with the new system, which then can be used to project the increase in the number of service calls made each week. For example, if the system permits the average service response time to fall to 4 hours, management believes that each truck will be able to make 16 service calls per week on average-an increase of 4 calls per week. With each truck making 4 additional calls per week and the average revenue per call at $150, the revenue increase per truck per week is $600 (4 X $150). With 10 trucks in service 50 weeks per year, the average annual revenue increase will be $300,000 ($600 X 10 X 50).

Decker Company management is unsure whether the new system will enable response time to fall to 4 hours on average, or will be some other number. Therefore, management has developed the following range of outcomes that may be possible outcomes of the new system, along with probability estimates of each outcome occurring:

New Response Time	# Calls/Truck/Week	Likelihood
2 hours	20	20%
3 hours	18	30%
4 hours	16	50%

Given these figures, prepare a spreadsheet model that computes the expected value of the annual revenues to be produced by this new system.

Martin is working to develop a preliminary cost-benefit analysis for a new client-server system. He has identified a number of cost factors and values for the new system, summarized in the following tables:

Development Costs-Personnel

2	Systems Analysts	400 hours/ea	@ $50/hour
4	Programmer Analysts	250 hours/ea	@ $35/hour
1	GUI Designer	200 hours/ea	@ $40/hour
1	Telecommunications Specialist	50 hours/ea	@ $50/hour
1	System Architect	100 hours/ea	@ $50/hour
1	Database Specialist	15 hours/ea	@ $45/hour
1	System Librarian	250 hours/ea	@ $15/hour

Development Costs-Training

4

Oracle training registration

$3500/student

Development Costs-New Hardware and Software

1	Development server		$18,700
1	Server software (OS, misc.)		$1500
1	DBMS server software		$7500
7	DBMS client software		$950/client

Annual Operating Costs-Personnel

2	Programmer Analysts	125 hours/ea	@ $35/hour
1	System Librarian	20 hours/ea	@ $15/hour

Annual Operating Costs-Hardware, Software, and Misc.

1	Maintenance agreem ent for server		$995
1	Maintenance agreement for server DBMS software		$525
	Preprinted forms	15,000/year	@ $.22/form

The benefits of the new system are expected to come from two sources: increased sales and lower inventory levels. Sales are expected to increase by $30,000 in the first year of the system's operation and will grow at a rate of 10% each year thereafter. Savings from lower inventory levels are expected to be $15,000 per year for each year of the project's life.

Develop a spreadsheet that summarizes this project's cash flow, assuming a four-year useful life after the project is developed. Compute the present value of the cash flows, using an interest rate of 9%.

What is the NPV for this project? What is the ROI for this project? What is the break-even point? Should this project be accepted by the approval committee?