Question

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?

Answer 1

		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