Question

Return on Investment (ROI) calculation: Given the following facts determine the ROI, which is the benefit of the investment divided by the cost of the investment, for a short term ROI.Remember ROI = Benefits - Costs / CostsDanforth Manufacturing Co. is looking at investing in an addition to the WELLCO module for their cost accounting of their business divisions. The additional module costs $400,000 and there is a $25,000 license fee per year it is used, also there is a $1,000 per user license after 10 users. There will be an additional $100,000 of investment in hardware that needs to be purchased for the applications, also $50,000 in labor costs to get the systems setup and running on the new hardware.The benefits from investing in the new software package are great, including far more efficient accounting processes. There will be $350,000 in resource savings also there will be $100,000 in employee savings. The more informed information will allow the accounting staff to save an additional $750,000 in recouped costs.1. What is the total cost of the project with a 60 user base?2. What will be the total benefits received?3. What is the overall ROI of the project given the information above?

Answer 1

Answer:

1- Total Cost of Project = (W-1) 600,000 $

2-Total Benifits Received = (W-2) 575,000 $

3- Overall ROI of Project= (W-3) 96%

Explanation:

(W-1) It includes one time cost incurred and paid initially. Following Cost are included in it.

Module Cost = $ 400,000

User license = $    50,000 (1000*50)

Hardware     = $   100,000

Labor Cost   = $     50,000

(W-2) Total benifits received includes all  cost saving - incremental costs. It is calculated as follow.

Liecense fee per years = $ (25,000)

Resource saving           =  $ 350,000

Employee saving          =  $ 100,000

Acounting staff cost     =   $ 750,000

saving

Project Cost                  =   $ (600,000)   *Depreciation

(W-3) ROI= W-2/W-3

               = 575,000/600,000