QUESTION

While the Walmart contract is large and would result in greater sales, there are many important quantitative and qualitative factors to consider, including strategic fit and stakeholder perceptions.

a) Compliance Level: Figure 2: Item 1. - Using the assumptions given to BabyFreedoms management team and an initial acquisition cost of US$25,000, construct a pro forma income statement incorporating the effects of accepting the Walmart contract. Use the mandated Walmart gross margin of 29.8%, and assume that BabyFreedom must maintain the same gross margin percentage for all revenues (in other words, it cannot charge a different, higher price to its medically necessary or natural clothing customers). For simplicitys sake, and because BabyFreedom has not determined its method of financing the RFID implementation, use the weighted average cost of capital to calculate interest.

b) Conservative Level: Figure 2 Item 2 - Construct a pro forma income statement using Item 2: approximately $250,000 in initial acquisition cost.

c) The initial report stated that there is a positive NPV for the first five-year contract period with Walmart. Verify this by using Excel and the pro forma income statement constructed in Assignment Question 2(a) and (b) to calculate the NPV value, given a 40% tax rate and 6.25% weighted-average cost of capital.

Figure 2: Projected Costs of Alternative Strategies for Implementing RFID Technology at BabyFreedom BabyFreedom is evaluating two viable levels of investment in RFID technology to meet Walmart's requirements. A brief description of each level, along with a description of certain key cost items, is presented here. 1. Compliance level: at least US$25,000 in initial acquisition cost for small companies Basic system of readers, tags, automated label printers, applicators and software No data integration "Slap and ship" with hand-held readers only Does not allow for future changes in customer requirements Selected costs: o Tags: US$0.10 each (basic, passive RFID tags) O Passive, handheld readers: US$3,000 each Human being waves the scanner near assets . Great for manual auditing of a location BabyFreedom would require three units (one at the entrance to the finished goods warehouse, one in the shipping area, and one backup unit) O RFID tag printers: US$2,500 each BabyFreedom would require two printers (one at the entrance to the finished goods warehouse plus one backup unit) o Ongoing costs for technology and maintenance (annual): approximately 15% to 20% of initial acquisition cost 2. Conservative level: approximately US$250,000 in initial acquisition cost Basic system, plus investment in middleware, server capacity, and ongoing service costs for third-party software Provides basic data integration and storage for manufacturer Provides more permanent installation Allows for basic technology consultation and implementation but not for future changes in customer requirements Selected costs: o Tags: US$0.10 each (basic, passive RFID tags) O Passive, handheld readers: US$3,000 each Human being waves the scanner near assets Great for manual auditing of a location BabyFreedom would require three units (one at the entrance to the finished goods warehouse, one in the shipping area, and one backup unit) o Passive, fixed-position readers: US$20,000 each Portal readers installed in doorways to detect assets moving through Cost includes hardware, installation, and configuration For conservative-level implementation, BabyFreedom would require two units (one at the entrance to the finished goods warehouse and the other in the shipping area) in addition to the handheld scanners O RFID tag printers: US$2,500 each BabyFreedom would require two printers (one at the entrance to the finished goods warehouse plus one backup unit) 0 Basic middleware package for small operation: US$25,000 o Initial technology consultation and implementation: US$50,000 0 Additional hardware and server capacity investment: US$50,000 o Ongoing costs for technology and maintenance (annual): approximately 15% to 20% of initial acquisition cost Figure 2: Projected Costs of Alternative Strategies for Implementing RFID Technology at BabyFreedom BabyFreedom is evaluating two viable levels of investment in RFID technology to meet Walmart's requirements. A brief description of each level, along with a description of certain key cost items, is presented here. 1. Compliance level: at least US$25,000 in initial acquisition cost for small companies Basic system of readers, tags, automated label printers, applicators and software No data integration "Slap and ship" with hand-held readers only Does not allow for future changes in customer requirements Selected costs: o Tags: US$0.10 each (basic, passive RFID tags) O Passive, handheld readers: US$3,000 each Human being waves the scanner near assets . Great for manual auditing of a location BabyFreedom would require three units (one at the entrance to the finished goods warehouse, one in the shipping area, and one backup unit) O RFID tag printers: US$2,500 each BabyFreedom would require two printers (one at the entrance to the finished goods warehouse plus one backup unit) o Ongoing costs for technology and maintenance (annual): approximately 15% to 20% of initial acquisition cost 2. Conservative level: approximately US$250,000 in initial acquisition cost Basic system, plus investment in middleware, server capacity, and ongoing service costs for third-party software Provides basic data integration and storage for manufacturer Provides more permanent installation Allows for basic technology consultation and implementation but not for future changes in customer requirements Selected costs: o Tags: US$0.10 each (basic, passive RFID tags) O Passive, handheld readers: US$3,000 each Human being waves the scanner near assets Great for manual auditing of a location BabyFreedom would require three units (one at the entrance to the finished goods warehouse, one in the shipping area, and one backup unit) o Passive, fixed-position readers: US$20,000 each Portal readers installed in doorways to detect assets moving through Cost includes hardware, installation, and configuration For conservative-level implementation, BabyFreedom would require two units (one at the entrance to the finished goods warehouse and the other in the shipping area) in addition to the handheld scanners O RFID tag printers: US$2,500 each BabyFreedom would require two printers (one at the entrance to the finished goods warehouse plus one backup unit) 0 Basic middleware package for small operation: US$25,000 o Initial technology consultation and implementation: US$50,000 0 Additional hardware and server capacity investment: US$50,000 o Ongoing costs for technology and maintenance (annual): approximately 15% to 20% of initial acquisition cost