Cost of Capital
0.09
1999
2000
2001
2002
4.3
0.6
3.5
2.3
8.6
0.3
1.7
4.5
0.3
1.2
0.1
16.7
14.0
6.9
4.1
1.3
6.8
0.6
1.8
0.2
17.5
13.5
3.7
0.9
0.6
5.2
4.4
8.6
1.8
1.7
12.1
9.4
0.6
11.3
10.3
54.9
0.0
0.0
46.6
(8.2)
2003
2004
0.7
9.0
0.6
2.4
0.3
17.1
12.1
0.6
3.0
0.4
4.0
2.6
0.3
3.0
0.4
3.7
2.2
10.1
4.0
2.5
16.7
11.8
6.7
6.8
3.3
16.8
10.9
3.8
9.9
3.4
17.1
10.2
Assumptions
45,000 Employee cost: average salary per employee (involved in implementation) =100k
200 Number of participating employees: 50 employees per each of the 4 waves.
12
15,400 Consulting Cost: 15,400 per month (per consultant) as stated in case.
184,800
Number of Consultants -
19
2000
2001
2002
4
1.00
A) the profit margin improves (.25% or .0025 by the second year after implementation, refer page 3 and exhibit 5) and
B) the product availability will improve (projected/targeted availability=92%) and 25% of increase in availability will be
converted into sales (refer page 3 and exhibit 4).
To find out the the additional revenues due to ERP implementation, we need to find out: ( Assumption is that without ERP
implementation, total units sold in future would have been constant i.e at the same level)
1) additional revenue due to increase in profit margin - to calculate this, multiply "increase in profit margin" by the "number of
units sold at present" (i.e. before ERP implementation)
2) Revenue coming from additional sales of products - to calculate this, multiply"the number of additional units sold" by the
"profit margin"
First of all we find out the avg. price of products
Product Price
Tot. Rev. (1997) - all regions
Tot. Units Sold (1997) - all regions
Avg. Price per Unit (1997) - all regions
Explanation
1,227,859,000 Adding revenues from all the regions (exhibit 5)
6,107,909 Adding units sold in all the regions (exhibit 4)
201 Arrived at the average price by dividing total revenue by total units sold.
(This assumption should not make a difference in the analysis as this avg.
price has been used later to forecast the aggregate revenues.)
73.5
83.1
76.8
83.2
2003
2004
0.25
0.4
0.4
0.2
0.4
2,271,139
1,415,949
977,665
1,443,156
2000
105,040
0
0
0
2003
0
31,505
59,442
50,799
2004
0
0
29,721
50,799
2000
105,040
0
0
0
2003
420,161
126,019
118,884
50,799
2004
420,161
126,019
148,605
101,598
2000
26,260
0
0
0
2003
105,040
31,505
29,721
12,700
2004
105,040
31,505
37,151
25,400
2004
$21,115,987
$6,333,351
$7,468,435
$5,106,013
Assumption: The margin improvement percentages (exhibit 5) are absolute increments (I.e not as a percentage of current margin percentage). For example, if current
margin is 12% and improvement in 2000 is .06%, we have assumed that total profit margin in 2000 would be 12.06%
Profit Margin 1997
Profit Margin
West
South
Central
North
2000
0.12
0.16
0.24
0.11
0.0006
0.0025
0.0025
0.0013
2003
2004
0.0025
0.0025
0.0025
0.0013
0.0025
0.0025
0.0025
0.0025
Additional Profit from Incr.Avail. (taking into account the increase in profit margins)
2000
2001
2002
2003
Total {A}
$636,647.02
$0.00
$0.00
$0.00
$636,647.02
$42,548.71
$2,216.67
$0.00
$0.00
$44,765.39
$105,579.94
$16,625.05
$3,883.59
$0.00
$126,088.57
$105,579.94
$31,666.76
$22,704.04
$3,318.91
$163,269.64
2004
$105,579.94
$31,666.76
$37,342.17
$19,402.85
$193,991.72
Assumption: Every year, the "current revenue" is multiplied by the "cumulative incremental margin" to arrive at the additional profits on the base revenue/(units sold)
Revenue
West
South
Central
North
1997
$477,784,000
$283,549,000
$185,625,000
$280,901,000
2000
0.0006
2003
0.0025
0.0025
0.0025
0.0013
2004
0.0025
0.0025
0.0025
0.0025
Total {B}
Total Add. Profit {A} + {B}
In Millions
Addition Profit from Increased Profit Margin on the existing (base) sales
2000
2001
2002
2003
$286,670
$1,481,130
$2,675,590
$3,870,050
$0
$283,549
$992,422
$1,701,294
$0
$0
$241,313
$705,375
$0
$0
$0
$365,171
$286,670
$1,764,679
$3,909,324
$6,641,891
$923,317.42
$1
$1,809,444.79
$2
$4,035,412.97
$4
$6,805,160.34
$7
2004
$5,064,510
$2,410,167
$1,169,438
$1,067,424
$9,711,538
$9,905,529.92
$10
2000
Projected Improvement of DSI (days) Inventory Value per Day (1997)
Improv. In DSI
12
1221
3
12
653
12
389
12
594
$3,663
$4
West
South
Central
North
Cummulative Savings
In Millions
2,271,139
1,415,949
977,665
1,443,156
6,107,909
0.75
2000
2001
2002
2003
2004
South
$0.00
$285,769.87
$1,009,051.35
$1,732,963.76
$2,441,833.26
2001
2002
4.8
4.2
4.2
4.8
4.8
2003
2004
2.4
4.8
$3,785
$4
Total
$450,000
$1,560,770
$3,129,252
$5,304,543
$7,289,227
$8,603
$9
$10,130
$10
3
4.8
4.8
$6,677
$7
Sum
$0.00
$285,769.87
$1,254,252.23
$2,829,542.61
$4,739,226.78
*Cost savings for South Central North for OPM analysis. Assume that 75% of other savings in case occurs in these three regtions
Calculated as {A}+{B}+ inventory savings
% range of
returns
20%
Benefits of exercising option Returns based on best, expected and worst case estimates by management; computations based on %
to implement in 3 regions
Expected
Worst
Best Rate/return-exp Rate/return wrst
Rate/return-bst
1999
0
2000
5,186,317
4,149,054
6,223,581
0.31
0.25
0.37
2001
12,112,845
9,690,276
14,535,414
0.69
0.55
0.83
2002
16,665,213
13,332,170
19,998,256
0.97
0.78
1.17
2003
16,782,560
13,426,048
20,139,072
4.20
3.36
5.03
2004
17,090,330
13,672,264
20,508,396
4.62
3.70
5.54
50,818,561
40,654,849
60,982,274
1.09
0.87
1.31
NPV in 2000 (Expected)
NPV(2000)/Exp.NPV(1 NPV(2000)/NPV(1999)
NPV of costs
$50,818,561
0.05
0.218
0.04
0.09
1
Computations
(2) d1= (ln(x/c)+(r+0.5 sigma-squared)(t*-t))/(sigma(sqrt(t*-t))
d1
(0.06)
d2
(0.28)
3,613,788
46,622,533
0.048
0.218
% of original costs
100%
54,851,092
r
discount rate
Option duration t*-t
0.004
0.019
0.038
0.704
0.853
0.05
NPV(2000)/NPV(1999)
Variance
1999
2000
2001
2002
2003
2004
NPV costs
Costs Wksht1*
11,261,200
16,663,200
17,543,600
17,139,200
4,000,000
3,700,000
Cost incurred
11,261,200
16,663,200
17,543,600
17,139,200
4,000,000
3,700,000
$54,851,092
Estimated Costs
1999
2000
0
5,186,317
Savings from Worksheet 1
2001
12,112,845
2002
16,665,213
2003
16,782,560
2004
17,090,330