Question 4 (20 marks)

T&A is one of the leading companies in fashion and design. The company has annual revenue of $2 billion and 12,000 employees. Currently, T&As information systems handle hundreds of thousands of transactions each day and they could no longer keep pace with the company's growth. For many years the company has relied on more than five information systems, all of which are outdated. Since these information systems are not fully integrated, the finance staff need a lot of time and effort in generating consolidated financial statements each month. Besides, they spend a lot of time in preparing financial analysis because it requires manual effort to gather all the necessary data. The company wants to acquire a new enterprise resource planning (ERP) system that could integrate all the business functions and processes. Ideally, the new ERP system links with a business intelligence software module that allows ad hoc multidimensional data analysis.

Suppose you are the Chief Financial Officer of the company. You are asked to present a business case for acquiring a new ERP system in the upcoming meeting. Specifically, you need to compare the economic feasibility analyses of two new ERP systems, system A and B, and provide a recommendation to the company. Assume the useful life is 7 years for both systems and the cost of capital (or annual discount rate) is 6% for the company. The companys required rate of return for any investment is 10%. The following data are provided for your evaluation.

The one-time investment costs are cash outflows which happen on day one of the projects. Except the depreciation cost, all the annual recurring costs and benefits are cash flows which happen at the end of each year. Both systems can be sold at the end of year 7 at a resale value equals to 10% of the initial investment costs. All the numbers shown are in thousands of US dollars. Although there are intangible benefits such as improvement in user satisfaction, decision making and control environment, they cannot be easily measured and quantified.

Required:

a. For both system A and B, calculate

(i) the discounted payback period in years,

(ii) the net present value in thousands of US dollars (iii) the internal rate of return in percentage

(iv) the return on investment in percentage

(4 marks) (4 marks) (4 marks) (4 marks)

You can ignore profit tax and depreciation effect in your calculation. You must show your workings.

b. Based on the results of part (a), which system do you recommend and why? (2 marks) c. What other factor should you consider as well? (2 marks)

One-time investment costs Costs of acquiring computer and network hardware Costs of software Costs of preparing the site for placing equipment Costs of data conversion from old to new system Costs of training Costs of testing System A 350 200 100 30 50 40 System B 380 280 110 35 60 45 Annual recurring costs in each of the seven years Costs of hardware maintenance Costs of software maintenance Costs of information technology personnel Costs of depreciation Costs of supplies relating to the information system Costs of cyber insurance to cover system failure System A 25 20 145 110 30 10 System B 28 30 190 130 35 12 Annual recurring benefits in each of the seven years Labor cost reduction Maintenance cost reduction Increased sales System A 200 28 160 System B 250 15 200