Business Case Analysis of an ERP System ERP Systems Bradford Carter Electronics, a distributor of semiconductors and electrical components, is considering implementing an ERP system. This project will represent a huge investment for Carter and thus a business case must be developed in order to gain approval for the project. With the help of knowledgeable process owners, a group of individuals who will likely be on the project team, and IT staff, the managerial accountants put together the following total cost of ownership and benefits over a 5 year horizon (the time estimated that the system will be used until a major upgrade). Carters cost of capital is 6% Required:

1. Based on the information provided, calculate a NPV of this project using 6% cost of capital.

2. Calculate a Return on Investment (ROI).

3. Calculate the Payback Period for the ERP system

4. Is this a good investment based on above calculations?

Tools Window Help 60% Tue 4:29 ROI.pdf (page 1 of 3) @ Q Search Item Technology ESTIMATED TCO One Time Recurring Comments Hardware and infrastructure upgrades $460,000 Costs for serversetwork/wiring/redundancy ERP software contract value $2,000,000 Expected negotiated net price Recurring software maintenance -level 3 support $350,000 18% of software contract value flow end of maintenance) Database and Identity and Access Management Software $220,000 Estimated for MS SQL Server and any of the top 5 IAM systems which are priced similarly Data Inventory master data accuracy and BOM master data $355,000 This data is in 2 different systems currently. Deemed to have major data duplication issues. Need scrubbing and restructuring into new format. All other master data scrubbing $200,000 Scrubbing customer, vendor, employee Writing interface programs $275,000 Multiple legacy systems will remain (e.g., fixed assets) Recurring data maintenance $140,000 2 full time persons for master data maintenance (ongoing 5 years) $285,000 Writing data conversion programs People Convert data to ERP format and migrate Internal Project Team $2,100,000 $180,000 Six full-time equivalent people; Center of Excellence - two full time * 60% Tue 4:3 Tools Window Help ROI.pdf (page 2 of 3) @ Q Search People $2,100,000 $180,000 Six full-time equivalent people; Center of Excellence - two full time people for 5 years Internal Project Team Change Management (consultants) $500,000 $100,000 Includes costs for communication, education, training; ongoing 2 years $1,600,000 Integrated project plan, budget etc. Project management (consultants) Configuration/customization of ERP software (consultants) $1,700,000 Adapting the software to use in the company/filling gaps Contingency -15% 15% 15% buffer on all one-time costs to avoid surprises. 3 60% D Tue 4:31 s Window Help ROI.pdf (page 3 of 3) L o @ Q Search ESTIMATED BENEFITS Comments Item Current Level % Improvement Annual Benefits $250,000,000 $3,750,000 Sales 5% Improvement in gross sales due to improved product availability and better service. Direct Labor Productivity $15,000,000 10% $1,500,000 Reductions in idle time, overtime, and other HR- related issues related to inefficiency of workforce. 6 Fewer Employees Needed Average loaded $50,000 annual salary $300,000 Reductions in clerical/data entry support and warehouse staff Purchasing costs $1,000,000 20% $200,000 Better planning and information = reduced total purchase costs. Inventory Item Current Levels % Improvement Annual Benefits Comments Raw Material and $17,000,000 WIP 4% Annual saving from better forecasting and also implementation of vendor $680,000 * 60% Tue 4:31 bols Window Help ROI.pdf (page 3 of 3) @ Q Search Inventory Item Current Levels % Improvement Annual Benefits 4% $680,000 Raw Material and WIP $17,000,000 Comments Annual saving from better forecasting and also implementation of vendor managed inventory Annual saving from better forecasting and also implementation of demand management module $1,530,000 Finished Goods 17% $9,000,000 50% Produce and ship on-time reduces shipment cost $800,000 $400,000 Premium freight Required: 1. Based on the information provided, calculate a NPV of this project using 6% cost of capital. 2. Calculate a Return on Investment (ROI). 3. Calculate the Payback Period for the ERP system 4. Is this a good investment based on above calculations