Super Skateboard Builders (SSB),

Inc.
Background1
Super Skateboard Builders (SSB), Inc. was founded in 1997 by John Z-boy Boeve,
the current president of the company, with the help of a small trust John received
from his maternal grandmother, a woman who motivated John to go to college and
to continue to pursue his skateboarding passion. She marveled at Johns
skateboarding finesse and encouraged him to find some way to earn a reasonable
living by capitalizing on his passion for the sport. John used the money from the
trust to buy the necessary shop and office equipment (storage bins, an assembly
table, desks, etc.) and lease a small building that would adequately house a
skateboard assembly operation.

The Problem
John recognized that the success of SSB would depend on the ability of his
employees to work seamlessly together in an integrated fashion providing
exceptional customer service. In the beginning when SSB was a small company
with fewer than 10 employees, it was easy to provide outstanding customer service.
However, as SSB grew during the next decade expanding its operations to 50
full-time employees and $5,000,000 in revenue, customer service declined,
customer complaints increased, and cash flow suffered. Furthermore, the sales
team was growing increasingly frustrated because they were promising products to
customers they could not deliver.

When John first started the company, he invested in some computer equipment and
basic office software to help track important information. He was a strong believer
in using the computer to store and track information related to any of lifes
worthwhile pursuits, especially if they were data-intensive. He purchased separate
software applications to help keep track of data for each of the key functional areas
in his organization - accounting, sales, and warehouse operations. While these
software applications served each functional area well, they lacked integration and
required significant manual intervention to perform routine business processes. For
example, when the sales team submitted an order in its order tracking software
application, the order had to be printed out and delivered to the warehouse and
accounting departments for processing. The manual process was problematic and
John felt it was one of the key reasons for the decline in customer service.
Accordingly, he was considering buying an enterprise system like SAP to use
throughout the organization.

Your Task
Before proceeding with the project, John has asked you to analyze the economic
feasibility of replacing his existing suite of applications with SAP. John would like to

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Adapted from Magal and Word 2009
know if the benefits realized from implementing the new system exceed the costs of
buying, implementing and using the system. Therefore, you must carefully examine
the cost and benefits of replacing the legacy system with SAP. To facilitate your
analysis, you will create a Microsoft Excel workbook detailing the costs of
purchasing, configuring, implementing, and supporting the system. The workbook
should also contain a list of the projected benefits and cost savings associated with
implementing the new system. Your analysis should take into account the time
value of money and calculate the ROI given a 5 year life expectancy for the new
system. The present value of a future cash flow may be calculated using the
following formula:

1
Present Value Factor = (1+r )t

Where,
r = discount rate
t = time period in years

The Costs
The costs of implementing the system may be categorized as either one-time costs
or recurring costs. One-time costs occur only once, during system acquisition and
implementation at the beginning of the project, while recurring costs continue every
year as long as the system continues to be used.

The following table summarizes the one-time and recurring costs associated with
the project.

One-Time Costs Dollar Amount

Software Licenses $500,500
Hardware $75,500
Network and Communications Upgrades $25,500
Training $25,500
Configuration and Implementation $1,750,500
Table - One-Time Costs

Recurring Costs Dollar Amount

Software License Maintenance Fees $80,500
New IT Employees (2 x 80,250) $160,500
Table - Recurring Costs

The Benefits
As a result of using the new system, SSB expects to reduce inventory holding costs
of raw materials and finished goods as well as dramatically increase their sales
yield, which is the number of sales quotes resulting in a sales order, due to
increased customer satisfaction, faster response time, dynamic pricing, and more
efficient procurement, production and fulfillment processes. Prior to using the
system, 50% of sales quotes resulted in an order. Using the new system, it is
expected that 80% of sales quotes will result in a sales order thereby increasing
revenue 60%. Assuming average annual sales of $5,000,000 with an average profit
margin of 25%, the new system is expected to contribute $750,500 annually to net
income. In addition to increased sales and profits, SSB expects to eliminate the
positions of four clerical workers who are responsible for the collection, storage and
processing of the documents used to support the manual process.

The following table summarizes the recurring benefits associated with implementing
the new system.

Recurring Benefits Dollar Amount

Increased Profit Due to Increased Sales $750,500
Reduced Inventory Holdings Costs $250,500
Reduction in Clerical Workforce (4 x $200,500
50,125)
Table - Recurring Benefits

The Deliverables
Part 1 The Excel Workbook
Use Excel to create a workbook to facilitate an analysis of the economic feasibility of
the project. The workbook should use fixed and variable cell references where
applicable to support rapid assessment of the business case under different
assumptions for interest rates, benefits and costs. The workbook should contain the
following six worksheets.

Table of Contents
This worksheet should list the contents of the workbook along with the purpose
of the workbook, the date the workbook was last modified, and the name of the
person who created the workbook.

One Time Costs

The one-time cost worksheet lists the one-time costs for the project contained
in Table 1.

Recurring Costs
The recurring cost worksheet lists the recurring costs of the project contained
in Table 2.

Recurring Benefits
The recurring benefits worksheet lists the recurring benefits of the project
contained in Table 3.

Economic Feasibility
For each year of the project calculate the recurring value of the benefits, the
present value factor for the given year, the present value of the benefits, the
net present value of all benefits, the one-time costs, the recurring costs, the
present value factor for the given year, the present value of the recurring
 costs, the net present value of all costs, the overall net present value, yearly
NPV cash flow, and overall NPV cash flow for the proposed project. Include a
cell to capture the discount rate. The following figure illustrates the layout of
the Economic Feasibility worksheet discussed above.

Break-Even Chart
Create a chart graphically depicting the break-even point for the project. (Hint:
Break-even occurs when the net present value of all costs equals the net
present value of all benefits).

Part 2 Questions to Answer using the Excel Workbook

Please answer the following questions using the workbook you created in Part 1. All
questions should be answered in a separate Microsoft Word document.

1. Assume a discount rate of 15%. What is the overall net present value for the
project? When will the project break-even? Should SSB move forward with the
project and proceed with implementing SAP? Explain your answer.

2. Assume a discount rate of 30%. What is the overall net present value for the
project? When will the project break-even? Should SSB move forward with the
project and proceed with implementing SAP? Explain your answer.

3. Assume the recurring value of the benefits due to increased sales was overly
optimistic and net income due to increased sales is only $375,500 instead of
$750,500. In addition, assume the benefits due to a reduction in inventory holding
costs are only $50,500 instead of $250,500. Assuming a discount rate of 15%, what
is the overall net present value for the project? When will the project break-even?
Should SSB move forward with the project and proceed with implementing SAP?
Explain your answer.

4 Assume the recurring value of the benefits due to increased sales was overly
optimistic and net income due to increased sales is only $375,500 instead of
$750,500. In addition, assume the benefits due to a reduction in inventory holding
costs are only $50,500 instead of $250,500. At what discount rate is the project
economically feasible? Should SSB move forward with the project and proceed with
implementing SAP? What are the implications of this change in sales to the
economic feasibility of the project? Explain your answer.