In: Operations Management
You have been asked to calculate the Return on Investment (ROI) for a project whose development will be accomplished during a single calendar year with the go-live date of Jan 1st The project, to develop a new Web-based ordering and fulfillment system, has already been conceptualized, and the team has provided estimates and a partial resource plan. Labor Operating expenses in years 2 through 5 are projected to be $57,000 annually. Miscellaneous expenses in years 2 through 5 are projected to be $6,500 annually. The benefit is projected to be $225,000 the first year of operation, increasing 11% each year. Hardware cost that would be installed for development is $100,000. You’ll need to complete the resource plan, the 5 year planning sheet, and calculate a 5 year ROI. Please finish filling out these tables and answer the associated questions.
Development Team |
Quantity |
$/hour |
Hours/each resource |
Total Hours |
Total Dollars |
Program Director |
1 |
95 |
500 |
||
Project Manager |
1 |
95 |
1000 |
||
BA |
1 |
95 |
750 |
||
Development Lead |
1 |
80 |
1000 |
||
QA Lead |
1 |
80 |
1000 |
||
Off-Shore Developers |
6 |
25 |
750 |
||
Off-Shore QA |
4 |
25 |
750 |
||
Total |
Expense |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Labor |
|||||
Hardware |
|||||
Misc |
Benefit |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Benefit |
|||||
Question 1 [2 points]: What is the total labor cost of development?
Question 2 [2 points]: What is the total expense of this project projected to be for the first 5 year period?
Question 3 [2 points]: What is the total benefit projected to be for the first year?
Question 4 [2 points]: What is the total benefit projected to be for the first five years?
Question 5 [2 points]: Given ROI % = ((Benefit – Cost) / Cost)*100, what is the 5 year ROI for this project?
Question 6 [2 points]: If the company could just put the money to cover the project expenses in the bank (instead of doing this project) it could make a investment gain of 7% over this same 5 year period. Should the company invest in this project, or put the money in the bank? Why?
Question 7 [4 points]: Describe in your own words BRIEFLY why APO05 and APO06 are important to project funding selection based on ROI calculation.
Question 1
Total hours = Quantity of resource * Hours/each resource
Total Dollars = Total hours * $ /hour
Development Team |
Quantity |
$/hour |
Hours/each resource |
Total Hours |
Total Dollars |
Program Director |
1 |
95 |
500 |
500 |
47500 |
Project Manager |
1 |
95 |
1000 |
1000 |
95000 |
BA |
1 |
95 |
750 |
750 |
71250 |
Development Lead |
1 |
80 |
1000 |
1000 |
80000 |
QA Lead |
1 |
80 |
1000 |
1000 |
80000 |
Off-Shore Developers |
6 |
25 |
750 |
4500 |
112500 |
Off-Shore QA |
4 |
25 |
750 |
3000 |
75000 |
Total |
561250 |
Question 2
Labour cost for year 1(development costs) = $561250
Labour cost for year 2-5(operation costs) = $57000
Miscellaneous cost for year 1 = $0
Miscellaneous cost for year 2-5 = $6500
Hardware costs are onetime costs incurred only during year 1
Hardware costs for year 1 = $100,000
Total cost each year = Labour cost + Miscellaneous cost for year + Hardware costs for year
Total costs for 5 years= S sum of Total cost each year i,
i=1,2,3,4,5
Total cost for 5 years
=661250+63500+63500 +63500 +63500
=$915250
Expense |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Sum |
Labor |
561250 |
57000 |
57000 |
57000 |
57000 |
|
Hardware |
100000 |
|||||
Misc |
6500 |
6500 |
6500 |
6500 |
||
Total |
661250 |
63500 |
63500 |
63500 |
63500 |
915250 |
Question 3
Total benefit/net Benefit each year = Benefit – cost
E.g. for year 1 =225000-661250 = $ -436250
Question 4
total benefit projected to be for the first five years = sum of total benefits for each year
= -436250 + 186250 + 213722.5 + 244216.975 +278065.8423
=$ 486005.32
Question 5
Given ROI % = ((Benefit – Cost) / Cost)*100, what is the 5 year ROI for this project?
ROI=( ($ 1401255 - $915250) / $915250 ) *100
=53.1%
Question 6
No.
ROI (bank) = 7%
ROI(project) =53.1%
The company gets more by investing in this project. Hence it should invest in the project