Question

In: Operations Management

You have been asked to calculate the Return on Investment (ROI) for a project whose development...

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.

Solutions

Expert Solution

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


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