Part II: Until now, the owner, Mike Thomas, kept the business records on his personal computer. He created a simple database to keep track of inventory, but it is not always up-to-date. He also developed spreadsheets to track expenses and payroll. The business has grown and Mike wants to install a new computer system to handle all business functions. ISYS 463 Individual Assignment #3 You are a student in the information systems department at the college. You were recently hired by Mare and he asked you to help him plan a system for University Bikes. You used an object-oriented approach to create a model of the business functions and actors involved. Now Mike wants you to do a "make or buy" analysis. Specifically, you will look into the pros and cons of in-house development versus purchase of a software package. Your research indicates that the most popular bike shop package is offered by a vendor called BikeExpert. In your last meeting, Mike said that tangible savings for a new system would be hard to measure, but improved customer care, better service department records, and increased productivity are expected. Mike estimates that these benefits will add up to about $6,500 per year, whether the system is developed in-house, or purchased from Bike Expert. You decide to compare relative costs to establish a total cost of ownership (TOC) over the useful life of the system. Based on your research, you put together the following summary: In-house development option The system will have a six-year useful life, be very flexible, and easiest to maintain. It will cost $18,000 to develop, install, and configure the system, and $1,500 to load existing data. Mike and the bookkeeper can handle day-to-day support with no added expense. BikeExpert software package option This is a vertical package with a five-year useful life. The software is less flexible than an in-house system and some customizing will be needed. It will cost $7,500 to purchase, $1,000 to install and configure, $1,500 to load existing data, and $1,500 additional hardware will be needed (Year 0 costs) Support is free for the first year (free for Year 1), then there is a $1,500 annual fee (from year 2) Tasks 4. Prepare a detailed list of pros and cons of in-house versus software purchase. 5. Calculate ROI for both options. 6. Calculate NPV for both options. Use an 8% discount factor. Year 0 Year 1 Year 2 Year 3 Year 4 Factor 1 0.926 0.857 0 .794 0.735 Year 5 0.681 Year 6 0.630 (8%)
