In: Accounting
Target Customer Kiosks
Target is considering the installation of customer kiosks in their stores. The kiosks will allow customers to search for products, tell them if the products are in stock, and show them on a map where in the store the products are located. Use the following facts to conduct a break-even analysis of the customer kiosk technology.
Costs
· There will be a one-time cost of $45,000,000 in 2018 to develop and implement the system software.
· Starting in 2019 there will be an annual software maintenance fee of $16,000 per store in which kiosks are installed to cover bug fixes and upgrades.
· Target has a total of 3,000 stores with kiosk installation occurring on the following schedule: 500 stores in 2018, 700 stores in 2019, 800 stores in 2020, and the remaining 1,000 stores in 2021
· Each store will have 8 customer kiosks installed. Two kiosks will be located at each entrance with the other kiosks located at select spots within the store.
· There is a one-time cost per kiosk of $32,000 which represents the kiosk’s purchase and installation.
· There is an annual hardware maintenance fee of $4,500 to maintain each installed kiosk starting in the year the kiosk is installed.
Benefits
The tangible benefits come from reduced labor costs and increased sales revenue.
· The kiosks are expected to reduce the need for employees to spend time directing customers to products. This time savings will result in reduced labor costs equivalent to employing one employee during regular store hours from 8am-8pm per store where kiosks are installed.
· Target stores are open 365 days per year.
· The sales associate labor rate is $10.50 per hour.
· The kiosks are also expected to increase the likelihood that customers will find all of the items they are looking to purchase. It is estimated that each store with kiosks will sell 130 additional items per day, averaging $1.85 per item.
Calculations
The break-even analysis will cover a 6-year period from 2018-2023.
For each year:
· Calculate the system costs and benefits.
· Calculate the net benefits of the system and the break-even totals for the system. Break even totals are simply the accumulated net benefits. The project breaks even when the accumulated net benefits value is positive.
For the total time period:
· Calculate the net present value (NPV) of the investment using a rate of 15%.
· Calculate the internal rate of return (IRR).
Answer the four questions at the bottom of the spreadsheet.
· In what year will Target break even on this project?
· Based on their target rate of return of 15%, should Target go forward with this project?
· In what year will Target break even if the employee labor rate per hour is $11?
· What is the NPV if the annual hardware maintenance fee is increased by $500?
Please fill in the following TEMPLATE only for UPVOTE
Break Even Analysis for Target Customer Kiosks | |||||||
Variables | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
Count of new stores installing kiosks | |||||||
Running total of stores with kiosks installed | |||||||
Number of kiosks per store | |||||||
One-time software development and implementation | |||||||
Purchase and installation per kiosk | |||||||
Annual software maintenance per store | |||||||
Annual hardware maintenance per kiosk | |||||||
Employee labor rate per hour | |||||||
Business days per year | |||||||
Regular store hours per day | |||||||
Additional items sold per store with kiosks | |||||||
Average revenue per additional item sold | |||||||
NPV Rate | |||||||
Costs | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
One-Time software development and implementation | |||||||
Purchase and installation of kiosks | |||||||
Annual software maintenance | |||||||
Annual hardware maintenance | |||||||
Total Annual Costs | |||||||
Benefits | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
Reduced labor | |||||||
Increased sales | |||||||
Total Annual Benefits | |||||||
Break-Even, NPV, and IRR Calculations | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
Net Annual Benefits | |||||||
Break-Even Totals (Accumulated Net Benefits) | |||||||
Net Present Value (NPV) | |||||||
Internal Rate of Return (IRR) | |||||||
Questions | |||||||
In what year will Target break even on this project? | |||||||
Based on their target rate of return of 15%, should Target go forward with this project? | |||||||
In what year will Target break even if the employee labor rate per hour is $11. | |||||||
What is the NPV if the annual hardware maintenance fee is increased by $500? | |||||||
Break Even Analysis for Target Customer Kiosks | |||||||||
Variables | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |||
A | Count of new stores installing kiosks | 500 | 700 | 800 | 1000 | ||||
B | Running total of stores with kiosks installed | 500 | 1200 | 2000 | 3000 | 3000 | 3000 | ||
C | Number of kiosks per store | 8 | 8 | 8 | 8 | 8 | 8 | ||
D | One-time software development and implementation | $45,000,000 | |||||||
E | Purchase and installation per kiosk | $32,000 | $32,000 | $32,000 | $32,000 | ||||
F | Annual software maintenance per store | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | $16,000 | ||
G | Annual hardware maintenance per kiosk | $4,500 | $4,500 | $4,500 | $4,500 | $4,500 | $4,500 | ||
H | Employee labor rate per hour | $10.50 | $10.50 | $10.50 | $10.50 | $10.50 | $10.50 | ||
I | Business days per year | 365 | 365 | 365 | 365 | 365 | 365 | ||
J | Regular store hours per day | 12 | 12 | 12 | 12 | 12 | 12 | ||
K | Additional items sold per store with kiosks | 130 | 130 | 130 | 130 | 130 | 130 | ||
L | Average revenue per additional item sold | $1.85 | $1.85 | $1.85 | $1.85 | $1.85 | $1.85 | ||
M | NPV Rate | 0.15 | 0.15 | 0.15 | 0.15 | 0.15 | 0.15 | ||
Costs | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |||
D | One-Time software development and implementation | $45,000,000 | |||||||
P=A*C*E | Purchase and installation of kiosks | $128,000,000 | $179,200,000 | $204,800,000 | $256,000,000 | ||||
Q=B*F | Annual software maintenance | $8,000,000 | $19,200,000 | $32,000,000 | $48,000,000 | $48,000,000 | $48,000,000 | ||
R=B*C*G | Annual hardware maintenance | $18,000,000 | $43,200,000 | $72,000,000 | $108,000,000 | $108,000,000 | $108,000,000 | ||
S=D+P+Q+R | Total Annual Costs | $199,000,000 | $241,600,000 | $308,800,000 | $412,000,000 | $156,000,000 | $156,000,000 | ||
Benefits | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |||
T=H*I*J*B | Reduced labor | $22,995,000 | $55,188,000 | $91,980,000 | $137,970,000 | $137,970,000 | $137,970,000 | ||
U=I*K*L*B | Increased sales | $43,891,250 | $105,339,000 | $175,565,000 | $263,347,500 | $263,347,500 | $263,347,500 | ||
V=T+U | Total Annual Benefits | $66,886,250 | $160,527,000 | $267,545,000 | $401,317,500 | $401,317,500 | $401,317,500 | ||
N | Year | 0 | 1 | 2 | 3 | 4 | 5 | ||
Break-Even, NPV, and IRR Calculations | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |||
W=V-S | Net Annual Benefits | ($132,113,750) | ($81,073,000) | ($41,255,000) | ($10,682,500) | $245,317,500 | $245,317,500 | ||
X | Break-Even Totals (Accumulated Net Benefits) | ($132,113,750) | ($213,186,750) | ($254,441,750) | ($265,124,250) | ($19,806,750) | $225,510,750 | SUM | |
PV=W/(1.15^N) | Present Value of Net AnnualBenefit | ($132,113,750) | ($70,498,261) | ($31,194,707) | ($7,023,917) | $140,261,077 | $121,966,154 | $21,396,596 | |
NPV=Sum of PV | Net Present Value (NPV) | $21,396,596 | |||||||
IRR | Internal Rate of Return (IRR) | 17.58% | (Using IRR function of excel over Net Annual Benefit(Row X) | ||||||
Questions | |||||||||
In what year will Target break even on this project? | 2023 | ||||||||
Based on their target rate of return of 15%, should Target go forward with this project? | Yes ,because NPV is positive | ||||||||
In what year will Target break even if the employee labor rate per hour is $11. | 2022 | Changing Value of Employee labor Rate per hour to $11 | |||||||
What is the NPV if the annual hardware maintenance fee is increased by $500? | ($11,543,821) | Changing Annual Hardware maintenance fees to $5000 | |||||||
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