INTEROFFICE MEMORAND UM

TO: FROM: SUBJECT: DATE:

JOHN SMITH, CHIEF INFORMATION OFFICER BOBBY DELEE, IT MANAGER FEASIBILITY ANALYSIS 01/27/12

Introduction
This memo pertains to the considerations made toward a lease or buy situation on a new telephony system. After careful review of the NPV analysis that was prepared, a recommendation to lease the system outweighed the option to buy.

Summary

Purchasing: By buying the phone system the company would have to make an
initial investment of $397,200 that would include the first years maintenance fees and overall lower operating costs.

Leasing: Based on the numbers that came about from the NPV analysis, it
would seem that leasing is the better option, with a savings of $5,138 over 7 years and an NPV value of 0.95%. This option is very feasible.

NPV Analysis: An analysis has been prepared showing the cost differences
between buying and leasing using a present value of 9%. As the analysis will show, it is very close in cost to either buy or lease.

Analysis

Advantages: The advantage of leasing over buying could simply be the

services that come along with the lease. With no maintenance costs and software issues to worry about, the company can focus on managing the services they provide to their customers. With shorter product life cycles and an increasing rate of technology change, companies need to look ahead to meet the needs of their customers. With the right research, leasing can be reasonable and cost efficient. Additional software may be implemented which allows for voice over the Internet capabilities, to allow for a more redundant form of communication. Again, with the evolvement of technology, businesses that want to stay competitive may find themselves upgrading their systems every three to five years.

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Disadvantages: The disadvantage of leasing the phone system is that it cant

be used as an asset. Being able to write off the depreciation value and gain a salvage percentage over the life of the investment would aid in covering costs. The life expectancy should be taken into account if the company is looking toward being around for the foreseeable future, then buying may be a better option. Although, technology may change, but the backbone that is the PBX will more than likely continue to be the same. With the hardware on some systems having a life expectancy of about 8-15years with routing maintenance.

Conclusions
By taking in all the factors involved in buying or leasing its ultimately up to the financing department to crunch the numbers and make the final decision. The analysis can be run with different present values to drop the NPV to zero and find out the IRR to get a better feel for the type of return to expect from the investment. Should the company decide to buy and have an asset of value or lease with options to upgrade when the time is right, either decision will make sense. Its the recommendation of this team that the lease option be considered.

Future Action
The next step in moving forward is to immediately begin the planning stage to see the implementation of the PBX. With so many factors involved with installing and operating such a complex piece of hardware, time becomes an issue, which costs money. With over 900 employees, the company needs to see to an effective form of communication with their customers, both internally and externally. Thank you for your time.

7-Year Economic Evaluation of PBX Alternatives Pre-Tax Analysis; Includes Inflation Allowance Uses "Standard Economic Model" Format & Assumptions
Only the cells highlighted in yellow require student input. Description Product Costs: PBX Voice Mail Spares Installation Sof tw are Shipping Trunk Installation Training Total Installed Cost Annual Costs: Lease Maintenance Moves, Adds, Changes Trunk Costs Annual Sof tw are Upgrades Floor Space (Sq. Ft.) Floor Space Costs Pow er & Air Cond (KW/Hr) Pow er & Air Cond Costs Depreciation (Straight Line) Salvage Value Purchase ($340,300) ($33,700) ($2,450) ($10,500) ($10,250) $0 $0 $0 ($397,200) Purchase $0 ($35,500) ($5,580) ($24,000) ($500) 325 ($33) 1.20 ($1,682) $71,496 $39,720 Lease $0 $0 $0 $0 $0 $0 $0 $0 $0 Lease ($53,000) $0 ($5,580) ($24,000) $0 325 ($33) 1.20 ($1,668) $0 $0 Com m on Cost Data Inf lation% Annual Inf lation Factor Pow er $/KWHr Cost of Money Depreciation Period (Years) Salvage% Floor Space$ ($/yr/sq f t) Item 5% 105% $0.16 7% 5 10% $24.00

Af f ects all costs except Lease Costs and Sof tw are Upgrades

Any number in parantheses represents a cost or negative cash f low . Enter them as negative numbers in the tab Numbers not in parantheses are benef its or positive cash f low . Enter them as positive numbers in the tables belo

Floor Space (Sq. Ft) * Floor Space Cost ($) Assume 24 hours a day, 365 days a year - 24 * 365 * KW/Hr * $/KWHr (Total Installed Cost - Salvage Value)/Depreciation Period (Years) Salvage% * Total Installed Cost

Description Purchase Operating Costs Maintenance Moves, Adds, Changes Trunk Costs Sof tw are (1) Floor Space Pow er & Air Conditioning Depreciation Salvage Annual Operating Costs Chart PV Factors PV Operating Costs Purchase Initial Cost Total PV Operating Cost TOTAL LCA COST

Year 0 ($35,500) ($5,580) ($24,000) ($500) ($7,800.00) ($1,682) $71,496 $0 ($3,566) 1.0000 ($3,566) ($397,200) ($143,796) ($540,996)

Year 1 ($37,275) ($5,859) ($25,200) ($500) ($8,190) ($1,766) $71,496 ($7,294)

Year 2 ($39,139) ($6,152) ($26,460) ($500) ($8,600) ($1,854) $71,496 ($11,209)

Year 3 ($41,096) ($6,460) ($27,783) ($500) ($9,029) ($1,947) $71,496 ($15,319)

Year 4 ($43,150) ($6,783) ($29,172) ($500) ($9,481) ($2,044) $71,496 ($19,634)

Year 5 ($45,308) ($7,122) ($30,631) ($500) ($9,955) ($2,147)

Year 6 ($47,573) ($7,478) ($32,162) ($500) ($10,453) ($2,254) $39,720 ($60,700)

Total ($253,541) ($45,432) ($195,408) ($3,500) ($63,508) ($13,694) $357,480 $39,720 ($213,384)

($95,662)

0.9174
($6,692)

0.8417
($9,434)

0.7722
($11,829)

0.7084
($13,909)

0.6499
($62,171)

0.5963
($36,195)

Use the PV Factor Chart to find the Factor ($143,796) at the given cost of m oney. The factor for

(1) A Fi xed-Term contract was si gned.

Description Lease Operating Costs Lease Costs Maintenance Moves, Adds, Changes Trunk Costs Sof tw are Floor Space Pow er & Air Conditioning Depreciation Salvage Annual Operating Costs Chart PV Factors PV Operating Costs Lease Initial Cost Total PV Operating Cost TOTAL LCA COST

Year 0 ($53,000) $0 ($5,580) ($24,000) $0 ($7,800.00) ($1,682) $0 $0 ($92,062) 1.0000 ($92,062) $0 ($535,858) ($535,858)

Year 1 ($53,000) $0 ($5,859) ($25,200) $0 ($8,190) ($1,766) $0 $0 ($94,015) 0.9174 ($86,249)

Year 2 ($53,000) $0 ($6,152) ($26,460) $0 ($8,600) ($1,854) $0 $0 ($96,066) 0.8417 ($80,859)

Year 3

Year 4

Year 5

Year 6

Total ($371,000) $0 ($45,432) ($195,408) $0 ($63,508) ($13,694) $0 $0 ($689,042)

($53,000) ($53,000) ($53,000) ($53,000) $0 $0 $0 $0 ($6,460) ($6,783) ($7,122) ($7,478) ($27,783) ($29,172) ($30,631) ($32,162) $0 $0 $0 $0 ($9,029) ($9,481) ($9,955) ($10,453) ($1,947) ($2,044) ($2,147) ($2,254) $0 $0 $0 $0 $0 $0 $0 $0 ($98,219) ($100,480) ($102,854) ($105,347) 0.7722 0.7084 0.6499 0.5963 ($75,845) ($71,180) ($66,845) ($62,818)

Use the PV Factor Chart to find the Factor ($535,858) at the given cost of m oney. The factor for

Purchase vs. Lease Cost Com parison Description Purchase Initial Costs ($397,200) Total PV Operating Cost ($143,796) TOTAL LCA COST ($540,996)

Lease Diff$ $0 $397,200 ($535,858) ($392,062) ($535,858) ($5,138)

Diff% -100% 273% 0.95%