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 these benefits will add up to about $8,500 per year, whether the system is developed in-house, or purchased from BikeExpert. 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 $21,000 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 customization will be needed. It will cost $9,500 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 $1,650 annual fee (from year 2) Tasks 4. Prepare a detailed list of the 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.

\begin{tabular}{|l|l|l|l|l|l|l|l|} \hline & Year 0 & Year 1 & Year 2 & Year 3 & Year 4 & Year 5 & Year 6 \\ \hline \begin{tabular}{l} Factor \\ (8%) \end{tabular} & 1 & 0.926 & 0.857 & 0.794 & 0.735 & 0.681 & 0.630 \\ \hline \end{tabular}