Chapter 1 Exercise 7

7. You have just been hired by a company and have wandered around talking to people. A few accountants have developed a database-driven application to handle fixed-assets and track depreciation. They claim the system has enabled them to function with one less accounting clerk ($30,000/year). A guy in finance has created a custom database in Microsoft Access to generate reports on a set of financial investments. Much of the data comes from brokerage firms and he notes that he is able to save 10 hours a week in clerical time (minimum wage). However, he complained about the difficulty of loading data from the main company database and says he spends 2 hours a week typing in data from printed reports. Two people in marketing have created separate databases to track survey and sales results for their projects. They claim the projects have not saved any labor costs, but enhance sales by at least $1 million a year. Yesterday, your manager said that all of these people complained about their existing systems and the inability to get data from the corporate database. You need to define projects for each group, identify the cost of developing a new system and the potential benefits. Rank the projects by economic return and make a recommendation to management.

Compute the present value of the money saved, assuming a project life of 5 years and a discount factor of 6 percent. The development costs need to be estimated, but since all three involve obtaining data from the corporate database, they should have similar costs. Double the marketing costs because it involves two projects. Even if you disbelieve the marketing numbers, the huge sales gain will outweigh almost anything else, placing the marketing project first. The trivial gain in clerical time in the finance project will place it last´┐Żpossibly even negative present value if the data costs are too high. It is likely to be cheaper to pay the clerical person to retype the data. The numerical results are in the sample spreadsheet.

Excel Spreadsheet