Assignment 1 Complete the following: 1. What are the advantages 4145

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Projects and Project Management

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Estimated Annual Benefits for CSMS

Estimated annual benefits for CSMS

Amount

Benefit or cost saving
Reca

pture/prevention of Lost saLes
$300,000 00

Increase sales to existing custorleTS

lncreased efficiency tn order processing

$50,000 00

TotaI
**plus B% annual qrowth

$1,0/,6,000.00

combined to give a net value. The future stream of benefits and costs are netted

together and then discounted'by a factor for each year in the future. The
discount factor is the rate used to bring future values back to cuffent values.
Figure 9-10 shows a copy of the NPV calculation done for RMO's new
CSMS. There are various techniques for calculating the NPV of a given investment. In this example, Year 0 represents the development period prior to the
deployment of the system. The annual benefits for each year are extended across
the top row. The development costs are shown on the second row. Annual
expenses are shown on the third. Those three rows are combined in the fourth
row to give the net benefits and costs. The fifth row shows the discount value,
given a 6 percent discount rate. The sixth row is the product of the fourth and
fifth rows and represents the net value in terms of today's dollars (i.e., the

point

break-even

|IPV). The seventh row shows a cumulative total of annual NPVs.
In Figure 9-10, the numbers in the seventh row eventually change from negative to positive. The point in time when that happens is called the break'even
point. The length of time before the break-even point is reached is called the
payback period. The payback period occurs in the year that the cumulative
value goes positive. To calculate it, first take the last year that the cumulative
value is negative-in this case, Year 2. Add to that year the number of days in
the following year (in this case, Year 3) that it takes for the cumulative value
to go positive. The method for doing that is to take absolute values of the ending value in Year 2 divided by the sum of the absolute values for the end of
Year 2 and Year 3-in this case, 226,865 divided by (226,865 + 430,743).
Here, t-hat calculation indicates that the cumulative value goes positive after
35 percent of the year has passed. Multiply .35 times the 365 days in the year
to get 128 days into Year 3. Many companies require a payback period of two
to three years on new software.
The previous cost/benefit calculation depends on an organization's ability
to quantify the costs and benefits. If it can indeed estimate a dollar value for a
benefit or a cost, the organization treats that value as a tangible benefit or

the point in time at

which doliar benefits offset dollar costs

payback

period

the time period after

which the dollar benefits have otfset the