Jennifer Eickert

Lauryn Jashinsky

Logan Moore

Madeline Rynkiewicz

Homework 2

B&K Distributors: Calculating Return on Investment for a Web-Based Customer Portal

After examining the assumptions provided in the case surrounding B&K’s average

transaction cost, base growth projection, and upside growth projection, we have determined that

they are facing a five-year internal rate of return of 40.6% (Exhibit 14A). If the assumptions are

correct, the implementation of a web-based portal for customers to place orders is a logical

investment. B&K’s internal rate of return for five years without the portal would only be 12%,

which is clearly inferior to the projected 40.6% stated earlier. Ultimately, our group would

recommend the implementation of the web based portal. However, one must consider the nature

of these projections before making any decisions and a sensitivity analysis must also be

conducted to determine how different sources of growth have the possibility to effect the

projected return if they vary from the initial projections. If our group were in Anfield and

O’Neil’s position of advising B&K’s upper level management, we would strongly recommend

that they consider answering the following questions of hypothetical scenarios that were not

addressed in the case:

What if the initial projections of growth (internal and external) are invalid or flawed?

How will our competitors respond?

If the portal experiences unforeseen technical issues what are the costs for additional

maintenance and customer service?

When technology advances, will it leave this portal outdated? If so, how soon?

These questions have no definitive answers, but a further analysis of IRR through different

years reveals that the project carriers significant risk. The three year IRR is only 3.3%, which is

significantly less than the 12% discount rate that B&K would achieve if they did not implement

the web portal (Exhibit 14A). Even though they will experience a positive total incremental cash

Jennifer Eickert

Lauryn Jashinsky

Logan Moore

Madeline Rynkiewicz

flow after Year 3, their net present value (NPV) is still negative because the IRR will not surpass

the discount rate until some point in Year 4. Therefore, if the project is set back by technical

difficulties or becomes outdated by further technological advancements, they may never

experience a rate of return higher than 12% and therefore, will never experience a positive NPV.

Of the many variables that are under assumption, one of the most radical is that their market

share will increase from 50% penetration to 70% (Exhibit 14B). As seen by the sensitivity

analysisthat was conducted, if the market share does not increase pass the base of 50%, B&K

will end up with a net present value of $ (337.62) (Figure 1). Therefore, in order to have a

positive NPV, they will need to be above almost 50% of their projected upside market

penetration (approximately 60%). This number is also aligned with the flat 2% growth rate of

franchises in general. If that estimate is understated, B&K will still be able to record a positive

NPV with a lesser degree of penetration. However, the inverse is also true, wherein the event that

their estimate is overstated, they will have to be much closer to their projected upside in order to

avoid a negative NPV.

The projected is undoubtedly carries a large amount of risk, but our group would recommend

that B&K’s senior management team move forward with the decision to implement the web

portal. There is a tremendous amount of upside to outweigh the risk and if things are managed

correctly after implementation, any major trouble should be avoided. They risk losing ground to

competition by not implementing it and may be forced to do it in the future regardless, where

costs have the potential to be higher and the upside significantly lower. The external assumptions

they have made are important, but internal assumptions such as market penetration are critical

because B&K has the opportunity to (at the very least) partially control them. Therefore, the

success of this project will be ongoing and must see commitment from all parties involved.

Jennifer Eickert

Lauryn Jashinsky

Logan Moore

Madeline Rynkiewicz

Exhibit 14A: B&K Distributors—ROI Model—Summary Page

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Revenue

Upside 3,400 4,643 5,619 6,487 7,293 7,886

Baseline 3,400 3,608 3,828 4,061 4,308 4,569

Incremental 1,035 1,791 2,426 2,986 3,316

Net income

Upside 411 583 734 878 1,003 1,121

Baseline 411 436 463 491 521 552

Incremental 147 272 387 482 569

Incremental investment program (after tax)

Upfront costs (387)

Ongoing costs (283) (291) (300) (309) (319)

Total (387) (283) (291) (300) (309) (319)

Total (after tax) (240) (175) (181) (186) (192) (197)

Total incremental cash flow (240) (28) 91 201 291 371

(240) (268) (177) 24 314 685

5 years 3 years

Internal rate of return 40.6% 3.31%

Net present value 346 (50)

Discount rate 12%

Tax rate 38%

Support cost inflation rate 3%

Jennifer Eickert

Lauryn Jashinsky

Logan Moore

Madeline Rynkiewicz

Exhibit 14B: B&K Distributors—ROI Model—Upside Projection

(Numbers in thousands) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Number of franchise locations 3,400 3,468 3,537 3,608 3,680 3,754

Growth 2.0% 2.0% 2.0% 2.0% 2.0%

Base 50.0% 50.5% 51.0% 51.5% 52.0% 52.5%

Upside 100% 50.0% 60.0% 65.0% 68.0% 70.0% 70.0%

Penetration 50.0% 60.0% 65.0% 68.0% 70.0% 70.0%

Number of customers 1,700 2,081 2,299 2,454 2,576 2,628

Tier structure

Percent 25% 28% 30% 32% 33% 33%

A # of locations 425 583 690 785 850 867

Order frequency 12 12 12 12 12 12

Percent 55% 58% 60% 60% 60% 60%

B # of locations 935 1,207 1,380 1,472 1,546 1,577

Order frequency 8 8 8 8 8 8

Percent 20% 14% 10% 8% 7% 7%

C # of locations 340 291 230 196 180 184

Order frequency 3 3 3 3 3 3

Average order size $250.00 $265.00 $280.90 $297.75 $315.62 $334.56

Growth 6.0% 6.0% 6.0% 6.0% 6.0%

Total transactions

A accounts 5,100 6,991 8,277 9,421 10,202 10,406

B accounts 7,480 9,655 11,037 11,777 12,366 12,613

C accounts 1,020 874 690 589 541 552

Total 13,600 17,520 20,004 21,787 23,108 23,571

Revenue

A accounts 1,275 1,853 2,325 2,805 3,220 3,481

B accounts 1,870 2,559 3,100 3,507 3,903 4,220

C accounts 255 232 194 175 171 185

Total 3,400 4,643 5,619 6,487 7,293 7,886

Unit margin

COGS % 68.70% 68.70% 68.70% 68.70% 68.70% 68.70%

Gross margin per order 78.25 82.95 87.92 93.20 98.79 104.72

Processing cost per order $29.50 $29.25 $28.71 $28.19 $28.77 $27.99

Net contribution per order 49 54 59 65 70 77

Account contribution

Transactions 13,600 17,520 20,004 21,787 23,108 23,571

Net margin per order 49 54 59 65 70 77

Operating income 663 941 1,184 1,416 1,618 1,808

Tax

Tax rate 38% 38% 38% 38% 38% 38%

Tax 252 357 450 538 615 687

Net contribution after tax 411 583 734 878 1,003 1,121

Jennifer Eickert

Lauryn Jashinsky

Logan Moore

Madeline Rynkiewicz

Exhibit 14C: B&K Distributors—ROI Model—Base Case Projection

(Numbers in thousands) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Number of franchise locations 3,400 3,468 3,537 3,608 3,680 3,754

Growth 2.0% 2.0% 2.0% 2.0% 2.0%

Penetration 50.0% 50.5% 51.0% 51.5% 52.0% 52.5%

Number of customers 1,700 1,751 1,804 1,858 1,914 1,971

Tier structure

Percent 25% 25% 25% 25% 25% 25%

A # of locations 425 438 451 465 478 493

Order frequency 12 12 12 12 12 12

Percent 55% 55% 55% 55% 55% 55%

B # of locations 935 963 992 1,022 1,053 1,084

Order frequency 8 8 8 8 8 8

Percent 20% 20% 20% 20% 20% 20%

C # of locations 340 350 361 372 383 394

Order frequency 3 3 3 3 3 3

Average order size $250.00 $257.50 $265.23 $273.18 $281.38 $289.82

Growth 3.0% 3.0% 3.0% 3.0% 3.0%

Total transactions

A accounts 5,100 5,254 5,412 5,575 5,741 5,912

B accounts 7,480 7,706 7,938 8,176 8,420 8,671

C accounts 1,020 1,051 1,082 1,115 1,148 1,182

Total 13,600 14,011 14,432 14,865 15,310 15,766

Revenue

A accounts 1,275 1,353 1,435 1,523 1,615 1,714

B accounts 1,870 1,984 2,105 2,234 2,369 2,513

C accounts 255 271 287 305 323 343

Total 3,400 3,608 3,828 4,061 4,308 4,569

Unit margin

COGS % 68.70% 68.70% 68.70% 68.70% 68.70% 68.70%

Gross margin per order 78.25 80.60 83.02 85.51 88.07 90.71

Processing cost per order $29.50 $30.39 $31.30 $32.24 $33.20 $34.20

Net contribution per order 49 50 52 53 55 57

Account contribution

Transactions 13,600 14,011 14,432 14,865 15,310 15,766

Net margin per order 49 50 52 53 55 57

Operating income 663 704 746 792 840 891

Tax

Tax rate 38% 38% 38% 38% 38% 38%

Tax 252 267 284 301 319 339

Net contribution after tax 411 436 463 491 521 552

Jennifer Eickert

Lauryn Jashinsky

Logan Moore

Madeline Rynkiewicz

Exhibit 14D: B&K Distributors—ROI Model— Average Transaction Cost Matrix

Figure 1

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Percentage of orders by channel:

Phone 60% 60% 57% 55% 52% 48%

Fax/mail 40% 35% 33% 30% 33% 32%

Web 0% 5% 10% 15% 15% 20%

Total 100% 100% 100% 100% 100% 100%

Cost per order:

Phone 32.50$ 33.48$ 34.48$ 35.51$ 36.58$ 37.68$

Fax/mail 25.00$ 25.75$ 26.52$ 27.32$ 28.14$ 28.98$

Web 3.00$ 3.03$ 3.06$ 3.09$ 3.12$ 3.15$

Weighted average cost 29.50$ 29.25$ 28.71$ 28.19$ 28.77$ 27.99$

WAC without Web 29.50$ 30.39$ 31.30$ 32.24$ 33.20$ 34.20$

Difference $ 1.14$ 2.58$ 4.04$ 4.43$ 6.21$

Inflation increases:

Phone 3.00%

Fax/mail 3.00%

Web 1.00%

Percent

of Upside345.57$

Market

Penetration

100.0% 345.57$ 70%

90.0% 277.25$ 68%

80.0% 208.93$ 66%

70.0% 140.61$ 64%

60.0% 72.30$ 62%

50.0% 3.98$ 60%

40.0% (64.34)$ 58%

30.0% (132.66)$ 56%

20.0% (200.98)$ 54%

10.0% (269.30)$ 52%

0.0% (337.62)$ 50%

Net Present Value