Until now, the owner, Bob, 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 Bob wants to install a new computer system to handle all business functions.

Bob recently asked you to help him plan a system for Discount Appliances. You used an object-oriented approach to create a model of the business functions and actors involved.

Now Bob 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 appliance shop package is offered by a vendor called ApplianceData. In your last meeting, Bob 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. Bob estimates that these benefits will add up to about $6,000 per year, whether the system is developed in-house, or purchased from ApplianceData.

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 $15,000 to develop, install, and configure the system, and $1,000 to load existing data.

• Bob and the bookkeeper can handle day-to-day support with no added expense.

ApplianceData software package option

• This is a vertical package with a four-year useful life.
• The software is less flexible than an in-house system and some customizing will be needed.
• It will cost $8,000 to purchase, $1,500 to install and configure, $2,500 to load existing data, and $1,000 additional hardware will be needed
• Support is free for the first year, then there is a $2,000 annual fee

Tasks

1. Prepare a detailed list of pros and cons of in-house versus software purchase.

2. Calculate ROI for both options.

3. Calculate NPV for both options. Use an 8% discount factor.

4. Create a PowerPoint presentation for Bob showing the results of your analysis, including recommendations and reasons.