Project Selection Exercise of Smart Semiconductor Limited

Your company Smart Semiconductor Limited (SML), a large producer of Car Chips, is considering the installation of a new marketing software package that will, it is hoped, allow more accurate sales information concerning the inventory, sales, and deliveries of its chips. The information systems (IS) department has received project proposals from three qualified bidders and evaluating the proposals.

They have to select a qualified bidder for the project and they are evaluating the project proposals in two major categories: i) the non-monetary technical requirements like performance, modularity, performance etc. and ii) the monetary factors like NPV, IRR etc. The details of the non-monetary selection criteria, the offered project proposal by the bidders are described below.

The project life is expected to be 10 years from project inception, at which time the proposed system will be obsolete for this division and will have to be replaced. It is estimated, however, that the software can be sold to a smaller division of SML and will thus have a salvage value of $20,000. SML has a 12 percent hurdle rate for capital investments and expects the rate of inflation to be about 1 percent over the life of the project. Assuming that the initial expenditure occurs at the beginning of the year and that all other receipts and expenditures occur as lump sums at the end of the year. Assuming 10 year life time of the SW, straight line depreciation to be used in the calculation of the payback period.

SMLs Technical (Non-Monetary) Requirement:

1. The proposed SW should be modular (Priority 5)
2. The SW should be reliable (Priority 1)
3. The SW system should be flexible for integration with other IT systems (Priority 3)
4. The SW should be quick to install (Priority 4)
5. The cost of the SW should not be expensive (Priority 2)

The above requirement factors, with the mentioned priority to be used to formulate the factor weightage matrix.

The bidders response or, offered solution against all these factors (requirement criteria) will be rated at a 1-5 scale as per the table below:

Low	Moderate	Good	Very Good	Excellent
1	2	3	4	5

Project Proposal and Offers from the Bidders

Bidder 01:

Bidder 1 submitted a project proposal that estimates the investment requirements as follows: an initial investment of $125,000 to be paid up-front to Bidder 01; an additional investment of $100,000 to modify and install the software; and another $90,000 to integrate the new software into the overall information system. Delivery and installation is estimated to take one year; integrating the entire system should require an additional year. Thereafter, the IS department predicts that scheduled software updates will require further expenditures of about $15,000 every second year, beginning in the fourth year. They will not, however, update the software in the last year of its expected useful life. The project schedule calls for benefits to begin in the third year, and to be up-to-speed by the end of that year. Projected additional profits resulting from better and more timely sales information are estimated to be $50,000 in the first year of operation and are expected to peak at $120,000 in the second year of operation, and then it is flat 50,000 per year in the rest of the years.

The offered SWs modularity is Moderate, it has got Very Good reliability, the softwares flexibility is Good for integrating with other systems, the time requirement for installing the SW is Excellent and the economy of the SW is Very Good.

Bidder 02:

Bidder 2 submitted a project proposal that estimates the investment requirements as follows: an initial investment of $155,000 to be paid up-front to Bidder 02; an additional investment of $90,000 to modify and install the software; and another $60,000 to integrate the new software into the overall information system. Delivery and installation is estimated to take one year; integrating the entire system should require an additional year. Thereafter, the IS department predicts that scheduled software updates will require further expenditures of about $25,000 every second year, beginning in the fourth year. They will not, however, update the software in the last year of its expected useful life. The project schedule calls for benefits to begin in the third year, and to be up-to-speed by the end of that year. Projected additional profits resulting from better and more timely sales information are estimated to be $50,000 in the first year of operation and are expected to peak at $120,000 in the second year of operation, and then then it is flat 40,000 per year in the rest of the years.

The offered SWs modularity is Excellent, it has got Poor reliability, the softwares flexibility is Moderate for integrating with other systems, the time requirement for installing the SW is Good and the economy of the SW is Moderate.

Bidder 03:

Bidder 03 submitted a project proposal that estimates the investment requirements as follows: an initial investment of $80,000 to be paid up-front to Bidder 03; an additional investment of $70,000 to modify and install the software; and another $40,000 to integrate the new software into the overall information system. Delivery and installation is estimated to take one year; integrating the entire system should require an additional year. Thereafter, the IS department predicts that scheduled software updates will require further expenditures of about $25,000 every second year, beginning in the fourth year. They will not, however, update the software in the last year of its expected useful life. The project schedule calls for benefits to begin in the third year, and to be up-to-speed by the end of that year. Projected additional profits resulting from better and more timely sales information are estimated to be $50,000 in the first year of operation and are expected to peak at $120,000 and then it is flat 30,000 per year in the rest of the years.

The offered SWs modularity is Poor, it has got Moderate, the softwares flexibility is Moderate for integrating with other systems, the time requirement for installing the SW is Good and the economy of the SW is Good.

Exercise Outcome:

You being the head of IS department need to carry out the technical and financial evaluation and rank the vendors based on their submitted proposal and offers. You are expected to provide the following:

1. Use the Weighted Factor Model to Rank and Select the best bidder only considering the non-monetary (technical criteria) factors
2. Calculate NPV, IRR, Pay Back Period and Benefit to Cost Ration of each of the bids
3. Rank the bidders based on NPV and suggest the best supplier based on monetary factors only.

----------------------------------------------------- Good Luck -------------------------------------------------------------------

Solution

(1) Defining design requirements

(2) Mathematical design

(3) Design verification using simulation

(4) Design modification, if any

(5) Performance analysis / investigation

(6) Addressing Complex Engineering Problems