Question

2. The engineering team at Manuel’s Manufacturing Inc. is planning to purchase an enterprise resource planning (ERP) system. The software and installation from Vendor A costs $380,000 initially and is expected to increase revenue $125,000 per year every year. The software and installation from Vendor B costs $280,000 and is expected to increase revenue $95,000 per year. Manuel’s uses a 4-year planning horizon and a 10% per year MARR.

a. What is the discounted payback period of each investment (do linear interpolation to answer)?

b. Based on DPBP, which ERP system should Manuel purchase?

Answer 1

a. What is the discounted payback period of each investment (do linear interpolation to answer)?

Discounted Pay-back Period of Vendor – A

Initial Cost = 380,000

Annual Revenue = 125,000

Planning Period = 4 years

MARR = 10%

Year	CF	PV Factor	DCF	CCF
0	($380,000)	1	($380,000)	($380,000)
1	$125,000	0.91	$113,636.36	($266,363.64)
2	$125,000	0.83	$103,305.79	($163,057.85)
3	$125,000	0.75	$93,914.35	($69,143.50)
4	$125,000	0.68	$85,376.68	$16,233.18

Using interpolation

Pay-back Period = 3+[-69,143.50 – 0 ÷ -69,143.50 – ($16,233.18)]*1 = 3.81 years

Discounted Pay-back Period of Vendor – B

Initial Cost = 280,000

Annual Revenue = 95,000

Planning Period = 4 years

MARR = 10%

Year	CF	PV Factor	DCF	CCF
0	($280,000)	1	($280,000)	($280,000)
1	$95,000	0.91	$86,363.64	($193,636.36)
2	$95,000	0.83	$78,512.40	($115,123.97)
3	$95,000	0.75	$71,374.91	($43,749.06)
4	$95,000	0.68	$64,886.28	$21,137.22

Using interpolation

Pay-back Period = 3+[-$43,749.06 – 0 ÷ -$43,749.06 – ($21,137.22)]*1 = 3.67 years

b. Based on DPBP, which ERP system should Manuel purchase?

Based on the DPBP, the ERP system from Vendor B should be purchased as it has less pay-back period than the Vendor A.

Select – Vendor B