Project Evaluation• Identify accurate measures of benefits and costs in monetary

terms and uses ration benefits/costs• Consider a proposed ERP implementation involving a study in year

1 conducted by a team , aided by a consultant• At this stage the expected costs are underestimated• Includes BPR study and formation of training team• Assumes a purchase of $3mn software from a vendor• Int training team to double the payroll cost during year 2• Extra HW in second year• Year 3 internal team with consultant will finish impl.• An extra budget of $500,000 is allowed for extra HW• Training team would grow after the first year• The operations cost of the system budgeted $2mn in Yr 4, growing

at the rate of 10% pa thereafter

ERP Implementation– Cost of capital is 20%– Majority : Benefits expectations: $4mn in Yr 4 and to

last for 7 Yrs– Benefits would grow 30% per year– Conservative estimates: Benefits to be lower after Yr

4, grow by 10% instead of 30%– The firm wants to treat first 3 yrs expenses as

investment

Project Evaluation- Cost Benefit

yearInternal team

Consultants Software hardware Training Benefit

Total Costs

1 500,000 500,000    200,000 01,200,00

0

2 1,000,0001,000,00

03,000,00

0 2,000,000 500,000 07,500,00

0

3 1,500,0001,000,00

0  500,000 2,000,000 05,000,00

0

4 2,000,000      1,000,000 4,000,0003,000,00

0

5 2,200,000      300,000 5,200,0002,500,00

0

6 2,420,000        6,760,0002,420,00

0

7 2,662,000        8,788,0002,662,00

0

8 2,928,200        11,424,4002,928,20

0

9 3,221,020        14,851,7203,221,02

0

10 3,543,122        19,307,2363,543,12

2

ERP Implementation

• Analyze the cost-Benefit sheet and give your comments

• What would be NPV of the project proposal using both the expected rates of benefit growth as shown in the excel sheet ???? And your comments/observation ?

• How much would be the IRR in both the cases ?

• How much would be the payback period in both cases?