## Question:

The aim of this assessment is to assess the student’s ability to create spreadsheets that can aid business problem solving and analysing results. The spreadsheet is a powerful tool that has become entrenched in business processes worldwide. A working knowledge of Excel is vital for most office based professionals today. CASE STUDY INFORMATION TECHNOLOGY PROPOSAL Global Athletic Apparel Manufacturer is a manufacturing company.

Its external consultant suggested that the company should have an inventory and sales database management system to help the company monitor its sales and products. GAAM’s Chief Information Officer, has decided to develop the software in-house. The project manager has assigned you to do conduct a feasibility study and cost estimates for the software development project. You are also asked to evaluate the cost-benefit analysis for the project.

ACCT6001 Assessment 3– Excel Spreadsheet Page 2 of 14 You need to present the results of your analysis and make recommendations on whether to continue with the development or not. Cost-Benefit Analysis Overview: Conducting a Cost-Benefit Analysis While it is important to provide decision-makers with a range of options, the process of developing and analysing these can be expensive and time consuming.

For major investments, it may be necessary to outline various potential options and then to have decision-makers select, after a preliminary screening, a smaller number for detailed appraisal. In any case, an appropriate level of consultation should be undertaken as best practice, either formally or informally, in creating a set of alternatives.

Step 1: Identify, quantify and value the costs and benefits of each alternative A critical step in the CBA process involves identifying, quantifying and valuing the costs and benefits of each alternative. The types of benefits and costs will depend on the project. To illustrate, consider the construction of a toll motorway to relieve traffic congestion. Relevant costs would include the labour, capital and material costs to construct the road and the value of the land as reflected in the loss of the use of the land for alternative purposes.

Benefits of the motorway would include lives saved, reduced travel time (which generally results in fuel and productivity benefits) and possibly the reduction of traffic on alternative routes, including the impact on inlet and outlet roads. Typical costs of a proposal would include:

• Initial capital costs;

• capital costs of any buildings, equipment, or facilities that need to be replaced during the life of the project;

• operating and maintenance costs over the period of a programme or project; and

• costs which cannot be valued in money terms (often described as ‘intangibles’). Typical benefits of a proposal would include:

• benefits which can be valued in money terms, in the form of revenues, cost savings or non-market outputs; and

• benefits which cannot be valued in money terms (also described as ‘intangibles’). Estimating the magnitude of costs can be difficult and will normally involve input from accountants, economists and other specialists.

16 Step 2: Calculate the Net Present Value In CBA, the net social benefit (NSB), or the excess of total benefit over total cost, is represented by the net present value (NPV) of the proposal. ACCT6001 Assessment 3– Excel Spreadsheet Page 3 of 14 Before determining the value (or NPV) of a proposal, the costs (C) and benefits (B) need to be quantified for the expected duration of the project. The NSB is calculated by subtracting the cost stream from the benefit stream and is represented as follows: NSB = B – C The NPV of a proposal is determined by applying a ‘discount rate’ (discussed below) to the identified costs and benefits. It is necessary to ‘discount’ costs and benefits occurring later relative to those occurring sooner.

This is because money received now can be invested and converted into a larger future amount and because people generally prefer to receive income now rather than in the future. Valuing each alternative by calculating NPVs facilitates comparison between proposals that exhibit different timing of their benefits and costs. Programmes with positive NPVs generally indicate an efficient use of the community’s resources. The NPV is calculated as follows: Where all projected costs and benefits are valued in real terms, they should be discounted by a real discount rate. This can be estimated approximately by subtracting the expected (or actual) inflation rate from the nominal discount rate.

If nominal (current price) values are used for projected costs and benefits, they should be discounted by a nominal discount rate. The discount rate can also be varied to test the sensitivity of the proposal to changes in this variable and, implicitly, to the phasing of costs and benefits. Sensitivity analysis is discussed in STEP 3 below. The Internal Rate of Return (IRR) is typically presented as supplementary information to the NPV. The IRR is the discount rate that will result in a NPV of zero. The project’s IRR needs to be above the benchmark discount rate for the project to be considered viable (financially or economically, depending on the nature of the analysis). Step 3: Sensitivity analysis and dealing with uncertainty .

The values of future costs and benefits on which the NPV is based are forecasts that cannot be known with certainty. While they should be forecast expected values, it is important to test the NPV for ‘optimistic’ and ‘pessimistic’ scenarios. This is achieved by changing the values of key variables in the analysis, such as the discount rate, costs and benefits, and measuring the impact of the changes on the NPV. This is known as sensitivity analysis and is a critical component of any CBA.

ACCT6001 Assessment 3– Excel Spreadsheet Page 4 of 14 Where the NPV is shown to be very sensitive to changes in a variable, the analyst should check on the appropriateness and impact of this variable, and whether any changes to the design of the programme or underlying assumptions are warranted. Uncertainties, or situations with unknown probabilities, that could have a significant impact on the project outcome should be clearly detailed in the report and, if necessary, monitored during implementation.

When dealing with uncertain data, the expected value should be used. The expected value is the weighted sum of the likely outcomes (each outcome having its own probability of occurring). In order to attempt to quantify the likely impact, a probability may be assigned to a particular variable where dealing with uncertain data. These probabilities are then used as weightings in order to derive an expected value. For example, assume a proposal that has two possible outcomes. The probability of producing an NPV of $5 million is 60% and the probability of producing an NPV of $3 million is 40%.

We can now work out the expected NPV (ENPV) as follows: ENPV = (0.6 x $5m) + (0.4 x $3m) = $4.2m The expected NPV in this situation is $4.2 million. However, such a single value may not fully convey the uncertainty associated with forecasting the outcome. Hence, it is generally appropriate to present the results as a range that includes the most likely results, as well as results in possible best and worst case scenarios. Reference: Mishan’s Cost-Bene t Analysis (1982, pp 221-224) provides a detailed explanation of the IRR, describes how to measure it, and provides an example to illustrate. See also Department of Finance and Administration the Handbook of CBA (2005). ACCT6001 Assessment 3– Excel Spreadsheet Page 5 of 14 Detailed instructions:

1. Create an Excel workbook with the following tabs: development time, costs for in-house development, benefits of in-house development, summary (in-house), payback period (inhouse), comparison and recommendation. 2. Create a development time spreadsheet a) The expected value of the work time required for a project is calculated as a weighted average of the optimistic (A), most likely (M) and pessimistic (B). For example, expected value Ei is defined as: Ei=(A+4M+B)/6 b) .

The development time spreadsheet should contain the following data (note you need to format the table and results to make it more professional looking): Note: the 90% probability range is the probability that the estimation is correct Now that you had the estimated work time (Ei) and also the 90% probability range, you can now compute for the Expected time needed in the development.

Here is an explanation on how you compute for the expected time: ACCT6001 Assessment 3– Excel Spreadsheet Page 6 of 14 • Person days/year = assuming 200 workdays available per year Computation Expected time Expected time = Ei/200 = 1800/200 9 person years 90% Prob. Range = (1484/200 … (2116/200) 7.4 person year .. 10.6 person years 3. Create the project team rate spreadsheet It should look like this: Note: You have to enter values for the low, medium, high and selected (for the selected, you can choose from the values you entered for low, medium or high – does not have to be the same as high values from the high column) Now you need to compute for the cost per hour and per day.

Note that the value for the per hour is based on the selected values column. Used referencing for the values in the per hour column. Per day is computed by multiplying the per hour to 8 (hours). Cost Units Units per hour per days Architect/Designer 50 400 Developer (Blended rate for Senior and Junior Developer) 30 240 Testing Lead 50 400 Tester 30 240 Technical Writing Cost 30 240 Manager 70 560 On-site Manager 150 1200 TOTAL 3280 ACCT6001 Assessment 3– Excel Spreadsheet Page 7 of 14 4. Next workbook contains all the costs for in-house development.

Your spreadsheet should look like this (note that students are required to input their own cost data except for the project team salary; the project team salary will be based on the total cost from the project team rate spreadsheet. The value for the project team salary starts on the third year and depreciates by 15% per year. Fiscal Year Cost Items 2016 2017 2018 2019 2020 Hardware $300,000 $250,000 $250,000 Software $200,000 $150,000 $150,000 Project Team Salary $300,000 $250,000 $250,000 Telecommunications $400,000 $450,000 $500,000 Training $150,000 $150,000 $150,000 Operations and Contingencies $400,000 $400,000 $400,000 Project Total Costs By Year $700,000 $650,000 $1,700,000 $1,000,000 $1,050,000 PROJECT TOTAL COST $5,100,000

Note: • You need to enter data for the cost of each item. The values shown above are just examples.

• The first fiscal year is entered – rest of the fiscal year is computed by adding a year (for example, if year 2016 is entered in the first fiscal year, the rest of the four years will automatically be computer by adding a year from the previous year).

• Project total costs by year is the sum of all cost items per year (you need to use the formula to compute for this).

• Project total cost is the total money you need to spend on your project.

• You need to format your tables (you can design it the way you want, just make it look more professional). Make sure that appropriate formats are used (e.g. date format for dates, percentage formats or money formats).

ACCT6001 Assessment 3– Excel Spreadsheet Page 8 of 14 5. Next workbook contains the benefits of in-house development: Fiscal Year Benefit Sources 2016 2017 2018 2019 2020 Cost Reduction (courier and returned goods) $500,000 $525,000 $550,000 Enhanced Revenues $250,000 $350,000 Decreased Employee Overtime $100,000 $100,000 Decreased Overhead $50,000 $50,000 $50,000 Total Benefits Per Year $0 $0 $550,000 $925,000 $1,050,000 Confidence Factor 100% 100% 100% 100% 100% Benefits Claimed for Analysis $0 $0 $550,000 $925,000 $1,050,000 Project Grand Total Benefit $2,525,000.

Note: • You need to enter data for the benefit value. The values shown above are just examples. Make sure you use formulas when appropriate.

• Fiscal year for Benefit sources is referenced to the first fiscal year in cost (if the year in the cost changes, the fiscal years in benefit sources automatically change too). Fiscal year for the 2 nd to 5th year are automatically computed based on the year in the first fiscal year (one year is added on the previous year).

• Cost reduction will start having the benefit on the third year and increases 5% every year

• Enhanced revenue can start on the third year (2018) and it increases 40% per year

• Total Beneifts by year is the sum of all benefit sources per year (you need to use the formula to compute for this).

• Benefits Claimed for Analysis is computed using the following formula : total benefits per year * confidence factor.

• Project Grand Total Benefit is the total benefits for 5 years.

• You need to format your tables (you can design it the way you want). Make sure that appropriate formats are used (e.g. date format for dates, percentage formats and money formats) ACCT6001.

Assessment 3– Excel Spreadsheet Page 9 of 14 6. Create a workbook that contains the summary of the cost-benefit analysis for in-house Fiscal Year 2016 2017 2018 2019 2020 Undiscounted Flows Costs $700,000 $650,000 $1,700,000 $1,000,000 $1,050,000 Benefits $0 $0 $550,000 $925,000 $1,050,000 Net Cash Flow -$700,000 -$650,000 -$1,150,000 -$75,000 $0 Discount Factors Discount Rate 7.0% Base Year 2016 Year Index 0 1 2 3 4 Discount Factor 1.0000 0.9346 0.8734 0.8163 0.7629 Discounted Flows Costs -$700,000 -$607,477 -$1,484,846 -$816,298 -$801,040 Benefits $0 $0 $480,391 $755,076 $801,040 Net -$700,000 -$607,477 -$1,004,455 -$61,222 $0 Cumulative -$700,000 -$1,307,477 -$2,311,931 -$2,373,154 -$2,373,154 Net Present Value ($2,373,154) Internal Rate of Return 21% .

Note: Fiscal year for Benefit sources is referenced to the first fiscal year in cost (if the year in the cost changes, the fiscal years in benefit sources automatically change too). Fiscal year for the 2nd to 5th year are automatically computed based on the year in the first fiscal year (one year is added on the previous year). ACCT6001 Assessment 3– Excel Spreadsheet Page 10 of 14 Values for yearly cost and benefits are referenced from the yearly cost and benefits (from cost table and benefits table) Net cash flow is computed by subtracting the cost from benefits.

Enter the value Discount rate – this is the cost of money that determines the time value of you costs and benefits (example if you are working with an interest-free loan, this would be zero; a typical value is around 8%). Base year is the current year; the year you want the future perspectives is computed Year index is computed using the following formula: fiscal year – base year Discount factor for each year is how much less the cash flows are worth because they are in the future.

It is computed using the following formula: 1/((1+Discount Rate)^year index) Costs for discounted flows cash per year is computed using the following formula: (-1) * undiscounted cost * discount factor Benefits for discounted flows per year is computed using the following formula: undiscounted benefits * discount factor Net is the sum of cost for discount flows and benefits for discounted flows. Cumulative net value is the cumulative net value so far (example 2016 value is the same as the net value; 2017 value is cumulative value of 2016 +2017 net value and so on).

When the cumulative value becomes positive, you have completed your payback period. Net Present Value is computed by using the NPV formula of following are the items for cost: = NPV(discount rate, net cash flow from 2017-2020,) + net cash flow for 2016 Internal Rate of Return is computed using the IRR formula of excel: = IRR(net cash flow from 2016- 2020, 0.1) 7. Create a worksheet that contains the graphs and recommendation:

• Create different graphs from the worksheets you created. Select several graphs that you think will be needed to make a valid analysis of the project. Example graph shown below (note that you can decide what is the best graph to use to represent your data): ACCT6001 Assessment 3– Excel Spreadsheet Page 11 of 14

• payback graph – indicate when the payback period is going to be Example: (600,000.00) (1,307,476.64) (2,311,931.17) (2,373,153.51) 52,853.26 2016 2017 2018 2019 2020 Payback period (in-house) ACCT6001 Assessment 3– Excel Spreadsheet Page 12 of 14 If you want to include the IRR as part of the comparison, either you create a separate graph or combine it with the graph above. Finally, make your recommendation. Make sure that you analyse all aspects of the project. Analyse all the data in your different worksheet. Use pivot tables to make your analysis more detailed. Submission Requirement: Students need to submit their Excel Spreadsheet. Criteria

• Formulae, formatting and cell references

• Graphs and pivot tables

• Cost-benefit analysis recommendation $3,101,713 ($2,250,909) ($3,000,000) ($2,000,000) ($1,000,000) $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 Net Present Value Inhouse Net Present Value Outsourced Net Present Value ACCT6001 Assessment 3- Excel Spreadsheet Page 13 of 14 Learning Rubrics Assessment Attributes Fail (Unacceptable) Pass (Functional) Credit (Proficient) Distinction (Advanced) High Distinction (Exceptional) Points Formulae, formatting and cell references 40% Formulae, formatting and cell references are mostly incorrect and incomplete.

Some data have been added. Points 0-14 More than 50% of the formulae, formatting and cell references are correct. Most data have been added. Points 15-20 More than 75 % of the formulae, formatting and cell references are correct. All data have been added. Points 21-30 Almost all formulae, formatting and cell references are correct. Very few errors (around 1 -2 errors) Cells are well formatted. All data have been entered correctly. Points 31-35 All formulae, formatting and cell references are correct (No errors). Cells are excellently formatted and easy to understand.

All data have been entered correctly. Points 36-40 Graphs and pivot table 40% No graphs nor pivot table or very poor implementation of graphs and pivot table Points 0-19 Graphs and/or pivot table are created with some errors (around 50%). Graphs created are simple. Points -20-25 Graphs and pivot table are created with minor errors (around 3-4 errors) Graphs and pivot table created are simple. Points 26-30 Graphs and pivot table are created with 1-2 errors Graphs and pivot table created have some design and readable. Points 31-35 Graphs and pivot table are created with no errors.

Excellent presentation of graphs and pivot table. Points 36-40 Cost-benefit analysis recommendation 20% Recommendations and analysis are not provided or incorrect. Points 0-9 Recommendations are provided but analysis was very shallow. Points 10-12 Recommendations are provided but and some detailed analysis is provided. Points : 12-15 Recommendations are provided and analysis is detailed. Points 16-18 Thorough explanation of the recommendations are provided and in-depth analysis is presented. Points.