Posted: September 12th, 2015

Cost benefit analysis of introducing a new technology

As the Information Systems Manager you have been given the responsibility for implementing a new “smart shopping trolley” system for a grocery/supermarket chain. This smart shopping trolley technology will help customers in the store by adding up the

Financial model of the business case
Based on your research develop a spread-sheet model of your business costs over a 6 year period; assume a discount rate of 10 per cent. Your business model should include the following analysis to ascertain the financial viability of the project:
1. Payback period
2. Net present value (NPV)
3. Internal rate of return (IRR), and
4. Profitability index
HINTS: To obtain the payback period you would first need to calculate the cumulative net cash flow. Use the NPV and IRR functions provided in Microsoft Excel. You may need to search the Internet for information if you are not familiar with how to use these functions. Provide an explanation to the CEO to help him/her interpret your results and what they mean.
Sensitivity analysis for the business case
Using the results you obtained above as the base case, conduct a sensitivity analysis to examine the impact of the critical cost and benefit variables on the viability of smart shopping trolley system project. Provide three specific scenarios of consideration. You must clearly specify the basis of the three scenarios i.e. which critical cost variables they are examining in the sensitivity analysis. Provide a note to explain the results to the CEO.

As the Information Systems Manager you have been given the responsibility for implementing a new “smart shopping trolley” system for a grocery/supermarket chain. This smart shopping trolley technology will help customers in the store by adding up the cost of items at the same time that they are placed in their supermarket trolley. It will also help shoppers locate the items in the store, in the quantities needed, when they enter or select a particular recipe.
As you have studied Information Systems Strategy, you know that introducing a new information technology system won’t be successful unless you have assessed the impact on the business strategy and the four business functions (marketing, production, finance and HR) within the firm. You also need to do a cost benefit analysis of introducing the technology across 10 stores in different regions, if the pilot study in the first store is successful. Your report includes a presentation to the CEO.

some examples are like this
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Project Benefits
Labour cost reduction $1,700,000 $2,125,000 $3,400,000 $5,695,000 $8,500,000 $11,050,000
Theft/ Shop Lifting $1,275,000 $3,825,000 $4,926,250 $6,970,000 $11,050,000 $14,025,000
Cost efficient in stock upgradtion $510,000 $1,020,000 $3,147,000 $5,185,000 $7,650,000 $8,075,000
sale of Existing Equipment $0 $2,465,000 $4,030,250 $0 $0 $0
TOTAL BENEFITS $3,485,000 $9,435,000 $15,503,500 $17,850,000 $27,200,000 $33,150,000
Project Costs
Lost value, Current Product $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
incremental Maintainence Cost $1,100,000 $700,000 $650,000 $650,000 $650,000 $650,000
Research And Development Cost $1,400,000 $900,000 $800,000 $800,000 $800,000 $800,000
project Management Cost $1,200,000 $900,000 $700,000 $700,000 $700,000 $700,000
Advertising Cost $1,000,000 $900,000 $650,000 $650,000 $650,000 $650,000
TOTAL COSTS $9,700,000 $8,400,000 $7,800,000 $7,800,000 $7,800,000 $7,800,000
EBITD ($6,215,000) $1,035,000 $7,703,500 $10,050,000 $19,400,000 $25,350,000
Less Depreciation $3,100,000 $3,100,000 $3,100,000 $3,100,000 $3,100,000 $3,100,000
EBIT ($9,315,000) ($2,065,000) $4,603,500 $6,950,000 $16,300,000 $22,250,000
Less Taxes ($2,794,500) ($619,500) $1,381,050 $2,085,000 $4,890,000 $6,675,000
Net Income ($6,520,500) ($1,445,500) $3,222,450 $4,865,000 $11,410,000 $15,575,000
Operating Cashflow ($3,420,500) $1,654,500 $6,322,450 $7,965,000 $14,510,000 $18,675,000
Initial Investment $18,600,000 $0 $0 $0 $0 $0 $0
Calculations of Depreciation
NOTE: Assuming that life of project is only 6 years as technolgy may change after 6 years and using straight line method following are the calculations

Depreciation=18,600,000/6= 3,100,000 Per Year
Year 0 1 2 3 4 5 6
CASH FLOW ($18,600,000) ($3,420,500) $1,654,500 $6,322,450 $7,965,000 $14,510,000 $18,675,000
INITIAL INVESTMENT $18,600,000

NET PRESENT VALUE INTERNAL RATE OF RETURN(IRR)
NPV= Present Value of future cash flow- Initial Investment
19%

Discount Rate PV of Future CF NPV PI
2% $41,278,056.65 $22,678,056.65 2.22
4% $37,355,172.44 $18,755,172.44 2.01
6% $33,870,943.46 $15,270,943.46 1.82
8% $30,768,494.85 $12,168,494.85 1.65
10% $27,999,281.39 $9,399,281.39 1.51
12% $25,521,735.80 $6,921,735.80 1.37
14% $23,300,156.60 $4,700,156.60 1.25
16% $21,303,789.79 $2,703,789.79 1.15
18% $19,506,067.70 $906,067.70 1.05
20% $17,883,976.02 ($716,023.98) 0.96
NPV GRAPH PROFITABILITY INDEX GRAPH
PAYBACK PERIOD
Year Cash Flow Cumulative Cash Flow
0 ($18,600,000) ($18,600,000)
1 ($3,420,500) ($22,020,500)
2 $1,654,500 ($20,366,000)
3 $6,322,450 ($14,043,550)
4 $7,965,000 ($6,078,550)
5 $14,510,000 $8,431,450
6 $18,675,000 $27,106,450

Year before full recovery+Remaining Balance to be recovered/cash flow in next year
Payback Period=
4.419
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