The ROI Analysis concluded an Internal Rate of Return (IRR) of 44% (see Exhibit 14A). The IRR is larger than 12% required and it has a positive NPV. Based on the information the project can be acceptable and can be a good investment.
The high IRR from the analysis hinges on optimistic projections of increasing market penetration and a steady growth in average order size. The key driver of the ROI analysis was the market penetration assumption. The allocation of Upfront vs. Ongoing Costs would also affect the IRR value.
2. How much value is generated from cost savings associated with the project?
From Exhibit 14D we can see that the expected "Transaction Cost" savings due to the new technology is
Year 1: $1.14
Year 2: $2.58
Year 3: $4.04
Year 4: $4.43
Year 5: $6.21
3. How much value lies in the improvement of revenues?
From Exhibit 14A we can see that the expected gain due to the new technology is
Year 1: $1,071
Year 2: $1,866
Year 3: $2,545
Year 4: $3,151
Year 5: $3,534
P.S. The numbers in the spreadsheet are a little different because of rounding
4. What additional factors should be included in the ROI analysis?
Flexibility of software, i.e. if business model or strategy changes?
Is organization ready for such a huge change?
Are the current customers ready and willing to embrace the new change, adoption of technology?
Does the business have the cash to fund this project?
Risk assessment- Project and Technology Risks
These are critical factors not quantified on these worksheets and can easily contribute to failure.
5. If you were B&K’s CEO, would you move forward with the project? Why or why not?
Strictly considering the data in this analysis, the B&K CEO should pursue this project. The IRR at 44% is much higher than the cost of capital, 12%. However, considerations beyond the data are required to make a fully informed decision.