• The acquisition cost is $35,000 paid at the time of installation.
• It reduces the wait staff by one person: Figure $10 per hour, or 2020 hours per year + 18% benefits.
• Money costs are 7%
• The system may become obsolete in three years.
a. Identify the ROI and NPV of the wireless order-taking system. Discuss some of the intangibles Lisa needs to consider and make a recommendation as to whether Lisa should order such a system.
I have come up with a total of $27,553.00 for the NVP. I am having trouble determining the ROI.
To calculate the ROI (Return on Investment), we need to determine the total benefits and costs associated with the wireless order-taking system.
First, let's calculate the annual cost savings from reducing the wait staff:
Annual cost savings = Cost per hour * Hours per year
= $10 * 2020
= $20,200.
Next, we need to calculate the annual benefits from the money costs saved:
Annual money costs saved = Acquisition cost * Money cost rate
= $35,000 * 7%
= $2,450.
Now, we can calculate the annual benefits of the wireless order-taking system:
Annual benefits = Annual cost savings + Annual money costs saved
= $20,200 + $2,450
= $22,650.
To calculate the ROI, we divide the annual benefits by the acquisition cost and express it as a percentage:
ROI = (Annual benefits / Acquisition cost) * 100
= ($22,650 / $35,000) * 100
= 64.71%.
Moving on to the NPV (Net Present Value), we need to consider the cash flows over the system's lifespan. From the information given, it seems the lifespan is three years.
To calculate the NPV, we need the following information:
- Cash inflows: Annual benefits
- Cash outflows: Acquisition cost
- Discount rate: Money costs rate
Using these inputs, we can calculate the NPV using the formula or a financial calculator. However, the value you provided for the NPV is incorrect, so let's calculate it correctly:
NPV = Cash inflows - Cash outflows
= (Annual benefits * Present value factor) - Acquisition cost
= ($22,650 * Present value factor) - $35,000.
To determine the present value factor, we need to consider the discount rate and the time period. Assuming the discount rate of 7% and a three-year lifespan, the present value factor can be calculated as follows:
Present value factor = 1 / (1 + Discount rate)^Years
= 1 / (1 + 7%)^3
= 1 / (1.07)^3
= 0.816.
Now, we can calculate the NPV:
NPV = ($22,650 * 0.816) - $35,000
= $18,465.60 - $35,000
= -$16,534.40.
Intangibles to consider:
1. Customer satisfaction: A wireless order-taking system may improve the customer experience by enhancing efficiency and reducing wait times.
2. Staff morale: The reduction in wait staff may affect the morale of remaining employees if they perceive it as a threat to job security.
3. Training and maintenance: Lisa needs to consider the costs associated with training staff to use the new system and any ongoing maintenance expenses.
Based on the provided calculations of the ROI and NPV, as well as considering the intangibles mentioned above, it seems that Lisa should not order the wireless order-taking system. With a negative NPV and a relatively low ROI, the project does not appear financially viable. However, Lisa should evaluate the intangible benefits and costs carefully before making a final decision.
To calculate ROI (Return on Investment) and NPV (Net Present Value) for the wireless order-taking system, we need to consider several factors and perform some calculations.
ROI is a measure of the profitability of an investment, expressed as a percentage. It can be calculated using the formula:
ROI = (Net Profit / Cost of Investment) x 100
To calculate the net profit, we need to consider all the costs and benefits associated with the system over a specified period. In this case, we will use a three-year period.
1. Calculate the cost savings from reducing the wait staff:
- We are reducing the wait staff by one person, which saves $10 per hour.
- Multiply the hourly saving by the number of hours worked in a year: $10 x 2020 hours = $20,200.
- Add 18% for benefits: $20,200 x 1.18 ≈ $23,836.
2. Calculate the annual cost of money:
- The money costs are given as 7% per year.
3. Calculate the cash flows for three years:
- Year 1: Reduced staffing cost savings of $23,836.
- Year 2: Reduced staffing cost savings of $23,836.
- Year 3: Reduced staffing cost savings of $23,836, plus the cost of system obsolescence.
4. Determine the acquisition cost and the cost of system obsolescence in year 3:
- The acquisition cost is $35,000.
- The system may become obsolete in three years, which means the cost would need to be replaced.
5. Calculate the net cash flows for each year by subtracting the cost of investment from the cost savings for that year.
Now, let's calculate the NPV:
1. Calculate the NPV by discounting the net cash flows for each year. The discount rate will be the annual cost of money, i.e., 7%.
2. Sum up the discounted net cash flows for all three years to get the NPV.
Regarding intangibles, Lisa needs to consider factors like customer satisfaction, potential increase in sales, efficiency gains, competitive advantage, ease of use, and long-term savings.
Based on the NPV of $27,553 and considering the intangibles mentioned above, Lisa should consider ordering the wireless order-taking system if the benefits outweigh the costs and if the NPV is positive. However, without additional information about the size of Lisa's restaurant, customer demands, and her long-term goals, it is challenging to make a conclusive recommendation.
Please note that the provided calculations and determinations are based on the information provided in the question. It's always important to consider any specific assumptions or additional data that may be necessary for a more accurate analysis.