In Chapter 6, you learned that Campus Bikes is a popular bicycle shop located ne
ID: 3805362 • Letter: I
Question
In Chapter 6, you learned that Campus Bikes is a popular bicycle shop located near a major university. The shop sells several brands of new bikes, including everything from high-end racing models to beach cruisers. In addition to sales of new bikes and accessories, Mark’s service department is always busy. The staff includes Mark himself, a bookkeeper, two part-time sales reps, a full-time mechanic, and several part-time service helpers who assemble bikes.
Background
Until now, the owner, Mark Turner, 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 Mark wants to install a new computer system to handle all business functions.
You are a lab assistant in the computer information department at the college. You earned a computer science degree at a two-year school, and you recently decided to work toward your four-year degree. Mark recently asked you to help him plan a system for Campus Bikes. You used an object-oriented approach to create a model of the business functions and actors involved.
Now Mark 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 BikeData.
In your last meeting, Mark 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. Mark estimates that these benefits will add up to about $3,000 per year, whether the system is developed in-house, or purchased from BikeData.
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:
Costs for Option A: Develop In-house
• 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.
• Mark and the bookkeeper can handle day-to-day support with no added expense.
Costs for Option B: Purchase BikeData Software Package
• 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
Benefits for Both Options: $3,000 per year
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 Mark showing the results of your analysis, including recommendations and reasons.
Explanation / Answer
1.
IN_HOUSE SOFTWARE
Pros-
Flexible
2 years more useful life
Easiest to maintain
No maintainence cost
Cons-
One time investment is little higher
SOFTWARE PURCHASE
Pros-
Less one time investment
Cons-
Less flexibility
Has annual fee of $2000 from 2nd years
Less useful life
2.
ROI for IN_HOUSE = 3000*6 - 15000 - 1000 = $2000
ROI for SOFTWARE PURCHASE = 3000*4 -8000 - 1500 - 2500 - 1000 -2000*3 = -$7000
3.
Case 1
3000/1.08 + 3000/1.08^2 + 3000/1.08^3 + 3000/1.08^4 + 3000/1.08^5 + 3000/1.08^6 - 15000 - 1000
= 2777.77 + 2572 + 2381.49 + 2205 + 2041 + 1890.50 -15000 -1000
= -2132.24
Case 2
3000/1.08 + 1000/1.08^2 + 1000/1.08^3 + 1000/1.08^4 - 13000
= 2777.77 + 857.33 + 793.83 + 735.02 -13000
= -7836.05