Case Study

Chapter 08
Group 03
Team Members

1 Nguyễn Huỳnh Tâm Đan - 22114057

2 Trần Hồng Đào - 22122769

3 Trần Thị Thanh Tâm - 22118474

Main contents

01 Evaluating IS Investments - Financial Perspective

02 ABC Company’s Case Study

03 Application in Start up Business

01
Evaluating IS Investments
(Financial Perspective)
IS Investments Evaluation
Definition
IS Investments Evaluation is the systematic process of
assessing whether an IS project or upgrade creates
sufficient value for an organization.

Value Types
● Tangible value: Financial benefits like revenue
growth or cost savings.
● Intangible value: Improved efficiency, customer
satisfaction, workflow optimization.
IS Investments Evaluation
Purpose
● Ensures alignment of IT investments with business goals.
● Helps allocate resources effectively to high-value projects.

Approach
● Strategic Approach: Align projects with organizational goals.
● Operational Approach: Evaluate improvements in processes or
service delivery.
● Financial Approach: Quantify monetary impact to prioritize
investments.
Four Key Financial Metrics

Return on Investment (ROI) Payback Period (PBP)

Net Present Value (NPV) Economic Value Added (EVA)

Return on Investment (ROI)
ROI measures the gain or loss from an investment relative to its cost. It's expressed
as a percentage and indicates how effectively the investment generates profit. Higher
ROI means better profitability.

While simple to calculate and understand, ROI doesn't account for the timing of
returns. A longer project with a higher overall ROI might not be as attractive as a
shorter project with a slightly lower ROI if you need a faster return on your investment.
Example: Project A ROI of 150% after 5 years

Project B ROI of 50% after 1 year

If you need a quick return, Project B is more attractive despite its lower ROI. While Project A
offers higher overall profit, you have to wait 5 years to recover your initial investment and
start seeing returns. ROI doesn't reflect this time factor.
Return on Investment (ROI)
Formula Where
Net Return
ROI = ———————— . 100% Net Return = Total Revenue - Total Cost
Investment Cost

Example:

Project A costing $50,000 generates Project B costing $30,000 generates

$65,000 in revenue: $55,000 in revenue:

65,000  50,000 55,000  40,000

ROI = ———————— . 100%  30% ROI = ———————— . 100% = 37,5%
A 50,000 B 40,000

Project B is more profitable in terms of return on initial investment.

Payback Period (PBP)

The payback period is the time it takes to recover the initial investment from
the projectʼs cash inflows. A shorter payback period generally means lower
risk.

This metric is primarily concerned with speed of capital recovery. It's best
when quick liquidity is crucial but it overlooks the potential for greater profits
after the payback period. It also assumes stable, predictable cash flows,
which might not be realistic in all situations.
Payback Period (PBP)

Formula Initial Investment

PBP = ——————————
Annual Cash Inflow

Example: For an investment of $100,000 generating $25,000 annually.

Initial Investment 100,000
PBP = —————————— = ————— = 4 years
Annual Cash Inflow 25,000

This clarity makes PBP ideal for quick assessments.

Payback Period (PBP)

After Payback
Example: Project A and B both have
a PBP of 3 years, but Project A
generates $10,000 annually
afterward, while Project B generates
$50,000.

PBP does not reveal this critical

difference. PBP does
not reveal
Net Present Value (NPV)
NPV is the difference between the present value of cash inflows and the present
value of cash outflows over time. It shows the projectʼs profitability by factoring in
the time value of money. If NPV is positive, the project is likely profitable.

Unlike ROI and Payback Period, NPV considers the time value of money, making
it more suitable for evaluating long-term investments. However, choosing the
right discount rate is essential, as a small change can significantly impact the NPV
calculation.

Formula Where
Ct: Cash inflow at time t
Ct
NPV = ∑ ———— t - C0 r: Discount rate
1 + r C0 : Initial investment
Net Present Value (NPV)
Example: A project with initial investment of $100,000 and cash flow $40,000
annually in three years. Calculate the NPV with discount rate of 10% and 8%.

Year Cash Flow

0 -100,000

1 40,000

2 40,000

3 40,000

Total Cash Flow 20,000

Net Present Value (NPV)
With discount rate = 10%

40,000 40,000 40,000

NPV = —————1 + —————2 + —————3 - 100,000 = $525
1  10% 1  10% 1  10%

With discount rate = 8%

40,000 40,000 40,000
NPV = ————— 1
+ ————— 2
+ ————— 3 - 100,000 = $3,084
1  8% 1  8% 1  8%

The choice of discount rate significantly affects the NPV.

Net Present Value (NPV)
In investment analysis, the discount rate is employed to calculate the present
value of future cash flows. The discount rate reflects two important factors:
● Opportunity cost: The potential return if you invested in another project.
● Risk: The uncertainty of receiving future cash flows.

The discount rate is a practical application of the Time Value of Money TVM,
quantifying how much future cash flows are worth today. It adjusts future values
to their present value by considering the opportunity cost and risk.

Example: $1 today could be invested to grow to $1.10 in a year with a 10% return.
So, when comparing future cash flows, we need to adjust them to reflect their
present value.
Economic Value Added (EVA)

EVA measures the profit generated after covering the cost of capital,
indicating whether a project creates value beyond its cost. A positive EVA
shows that the project not only covers the capital cost but also generates
returns exceeding the minimum required by investors. This focus on value
creation makes EVA a powerful metric for strategic decision-making.
Strategic decision-making is the process of making important decisions
that have a significant impact on an organization's long-term direction and
growth.
Economic Value Added (EVA)
Formula

EVA  Net Operating Profit After Taxes NOPAT - Capital Invested x Cost of Capital)

Example: If a project earns $120,000, requires a $500,000 investment,

and the cost of capital is 10%
EVA  120,000 - 500,000  10% = $70,000
A positive EVA of $70,000 → project adds value
Comparison of Metrics
Metric Conditions of Use Limitations Best For

Best for short-term

Ignores time value of money Quick
ROI comparisons or decisions with
and future cash flows. comparisons
clear cost and revenue.
Useful when quick payback is Does not consider
Short-term risk
PBP critical; cash flows must be post-payback cash flows or
projects
predictable. time value of money.
Suitable for long-term projects; Requires accurate cash flow
Long-term
NPV accounts for the time value of forecasts; sensitive to
evaluations
money. discount rates.
Complex and data-intensive;
Ideal for strategic projects; Strategic
EVA less suited for short-term
measures true economic profit. project
projects.
Comparing Metrics by Stage

1 2 3

Before Investment During Investment After Investment

Determine the feasibility Monitor progress and Evaluate the effectiveness
and profitability of the ensure the project is of the project after
project to guide aligned with financial goals. implementation, ensuring it
decision-making. meets expected outcomes.
Comparing Metrics by Stage
Metric Before Investment During Investment After Investment
Compare project Monitor progress and Assess overall
ROI profitability and make alignment with expected profitability after
initial decisions returns completion
Check how quickly the
Track recovery milestones Rarely relevant after the
PBP investment will be
and identify delays payback period ends
recovered
Analyze feasibility using Reassess project value Review financial
NPV future cash flows and with updated cash flow success over the long
discount rates data term
Measure incremental Evaluate the economic
Seldom used in initial
EVA value generated during value added after the
evaluation stages
implementation project ends
02
ABC Company’s
Case Study
The question
A new inventory management system for ABC Company could be
developed at a cost of $260,000. The estimated net operating costs and
estimated net benefits over six years of operation would be:
a. What would the payback period be for this investment? Would it be a good or
bad investment? Why?
b. What is the ROI for this investment?
c. Assuming a 15% discount rate, what is this investment’s NPV?
a. What would the payback period be for this investment?
Would it be a good or bad investment? Why?

Year Net Operating Cost Net Benefits

(Cash inflow) Cost
(Cash Outflow)
Formula:
0 260,000 0
1 7,000 42,000 Net Cash Flow
= cash inflows - cash outflows
2 9,400 78,000
3 11,000 82,000 Cumulative Cash Flow
4 14,000 115,000 = CFt-1 + CFt
5 15,000 120,000
6 25,000 140,000
a. What would the payback period be for this investment?

Year Net Operating Cost Net Benefits Net Cash Flow Cumulative Cash Flow
(Cash Inflow) (Cash Outflow) (Cash Inflow - Cash (CFt-1 + CFt)
Outflow)
0 260,000 0 -260,000 -260,00000
1 7,000 42,000 35,000 -225,000
2 9,400 78,000 68,600 -156,4000
3 11,000 82,000 71,000 -85,400
4 14,000 115,000 101,000 15,400
5 15,000 120,000 105,000 120,600
6 25,000 140,000 115,000 235,600

=> Remaining Amount Needed = 260,000 - Total Cumulative Cash Flow up to Year 3
= 260,000 - 174,600 = 85,400
a. Would it be a good or bad investment? Why?

The investment would generally be

To determine the fraction of the year required in Year 4:
considered good if:
Payback within Acceptable Timeframe:
Net Cash Flow in Year 4: 101,000
Amount remaining at end of Year 3: if 3.85 years is acceptable, it’s good
85,400
Fraction of Year 4 needed: 0.85
Profitability:

In year 6, the CCF is significantly

=> The payback period is approximately 3.85
positive (235,600) that generates
years (3 years + 85% of Year 4). profit over time
b. What is the ROI for this investment?
c. Assuming a 15% discount rate, what is this investment’s NPV?
b. What is the ROI for this investment?
ROI= ((Total Net Benefit - Total Cost ) / Total Cost ) *100
= ((577,000-341,400)/ 341,400) *100 = 69%

c. Assuming a 15% discount rate, what is this investment’s NPV?

NPV = - Initial Investment + Annual Net Benefit/ (1 + r)^ n
= -260,000 + 35,000/ (1 + 15%)^ 1 + 68,600/ (1 + 15%)^ 2 + 71,000/ (1 + 15%)^ 3 +
101,000/ (1 + 15%)^ 4 + 105,000/ (1 + 15%)^ 5 + 115,000/ (1 + 15%)^ 6 = 28,658

Result: NPV = 28,658 > 0 → This project has a positive value, making it a
worthwhile investment.
Recommendation & Conclusion
Recommendation
Investment Recommendation: The company should proceed with investing in this
new inventory management system.
Long-term Benefits: The project will enhance inventory management efficiency,
helping to reduce operating costs and increase long-term profits.
Risk Assessment: The company should consider potential risk factors that may
impact the projected benefits, such as market fluctuations or unforeseen costs.
Recommendation & Conclusion
Conclusion

This warehouse management system project has the potential to be

profitable and add value to ABC Company. However, careful
implementation planning and risk management are needed to ensure
long-term financial and operational performance.
03
Application in
Start up Business
Which one is appropriate for the business?
Startup Business - Grocery Store:
- Around 10 employees.
ERP SaaS - Providing daily essentials at
affordable prices with
convenience and dedicated
OR service, enhancing the
quality of life for the local
community.
ERP Low - cost
Cost and Revenue Estimate of ERP SaaS (2025 - 2027)
Detailed table (Unit: USD)
2025 2026 2027 Total
Subscription Fee 2,000 2,100 2,200 6,300
Implementation Fee 1,500 - - 1,500
Training Fee 800 200 200 1,200
Support & Maintenance Fee Included Included Included Included
Integration Fee 500 - - 500
Data Fees 300 350 400 1,050
API Fees 200 200 200 600
Total Cost of ERP SaaS 5,300 2,850 3,000 11,150
Cost and Revenue Estimate of ERP SaaS (2025 - 2027)

General table (Unit: USD)

2025 2026 2027 Total

Estimated Revenue 80,000 88,000 96,800 264,800

Operating Costs 60,000 63,000 66,150 189,150

ERP SaaS Cost 5,300 2,850 3,000 11,150

Operating & ERP SaaS Cost 65,300 65,850 69,150 200,300

Gross Profit (Revenue - Expenses) 14,700 22,150 27,650 64,500

Discounted Cash Flow (8%) 13,611 18,990 21,950 54,551

Cost and Revenue Estimate of ERP Low-cost (2025 - 2027)

Detailed table (Unit: USD)

2025 2026 2027 Total
License Fee 1,000 - - 1,000
Implementation Fee 500 - - 500
Training Fee 500 200 200 900
Support & Maintenance Fee 300 300 300 900
Upgrade Fee - - 400 400
Hardware Costs 2,000 - - 2,000
IT Costs 1,200 1,200 1,200 3,600
Total Cost of ERP Low-cost 5,500 1,700 2,100 9,300
Cost and Revenue Estimate of ERP Low-cost (2025 - 2027)

General table (Unit: USD)

2025 2026 2027 Total

Estimated Revenue 80,000 88,000 96,800 264,800

Operating Costs 60,000 63,000 66,150 189,150

ERP Low-cost Cost 5,500 1,700 2,100 9,300

Operating & ERP Low-cost Cost 65,500 64,700 68,250 198,450

Gross Profit (Revenue - Expenses) 14,500 23,300 28,550 66,350

Discounted Cash Flow (8%) 13,426 19,976 22,664 56,066

ROI of ERP SaaS & ERP Low-cost
Total Net Benefit - Total Costs
ROI = x 100
Total Costs

264,800 - 200,300 264,800 - 198,450

ROI = x 100 ROI = x 100
200,300 198,450

→ ROI of ERP SaaS = 32.2% → ROI of ERP Low-cost = 33.4%

Cash Flowt
NPV of ERP SaaS & ERP Low-cost NPV =
(1 + r)t
13,611 18,990 21,950
NPV = + + = 46,308 USD
1
(1 + 8%) (1 + 8%) 2
(1 + 8%) 3

→ NPV of ERP SaaS = 46,308 USD

13,426 19,976 22,664

NPV = + + = 47,549 USD
1
(1 + 8%) (1 + 8%) 2
(1 + 8%) 3

→ NPV of ERP Low-cost = 47,549 USD

EVA of ERP SaaS & ERP Low-cost

EVA = NOPAT - (Invested Capital x Cost of Capital)

Calculate NOPAT: This is the operating profit after tax. NOPAT is usually
calculated by taking the gross profit and subtracting the tax (assumed
to be 20% or another appropriate tax rate).

NOPAT = Gross Profit x (1 - Tax Rate)

EVA of ERP SaaS & ERP Low-cost
NOPAT = 14,700 x (1 - 20%) = 11,760 USD
EVA = 11,760 x (5,300 - 8%) = 11,336 USD
→ EVA of ERP SaaS = 11,336 USD

NOPAT = 14,500 x (1 - 20%) = 11,600 USD

EVA = 11,600 x (5,500 - 8%) = 11,160 USD
→ EVA of ERP Low-cost = 11,160 USD
Payback Period of ERP SaaS & ERP Low-cost
The formula is used to calculate when cash flow are uneven

Remaining Amount
Payback Period = N +
Cash Flow of the Following Year

● N = Number of full years before recovering the initial investment.

● Remaining Amount = The unrecovered amount of the investment after N years.
● Cash flow of the Following Year = The cash flow in the year after N years.
Payback Period of ERP SaaS
- Year 2025
Initial Investment = 5,300 USD (cumulative cash flow = -5,300 USD).
Net Cash Flow = 14,700 (Cumulative Cash Flow = -14,700 USD).

- Year 2026
Net Cash Flow = 22,150 USD.
Cumulative Cash Flow = -14,700 + 22,150 = 7,450 USD.

- Year 2027
Net Cash Flow = 27,650 USD.
Cumulative Cash Flow = 7,450 + 27,650 = 35,100 USD.
→ The payback period falls between 2025 and 2026.

Payback Period 14,700

1+ = 1.66 years (1 year, 7 months and 28 days).
=
22,150
Payback Period of ERP Low-cost
- Year 2025
Initial Investment = 5,500 USD (cumulative cash flow = -5,500 USD).
Net Cash Flow = 14,500 (Cumulative Cash Flow = -14,500 USD).

- Year 2026
Net Cash Flow = 23,300 USD.
Cumulative Cash Flow = -14,500 + 23,300 = 8,800 USD.

- Year 2027
Net Cash Flow = 28,550 USD.
Cumulative Cash Flow = 8,800 + 28,550 = 37,350 USD.
→ The payback period falls between 2025 and 2026.

Payback Period 14,500

1+ = 1.62 years (1 year, 7 months and 13 days).
=
23,300
Summary
Metrics ERP SaaS ERP Low-cost Result
ROI 32.2% 33.4% ERP Low-cost

NPV 46,308 USD 47,549 USD ERP Low-cost

EVA 11,336 USD 11,160 USD ERP SaaS

Payback
1.66 years 1.62 years ERP Low-cost
Period

Choosing Low-cost ERP for Start-up Grocery Store business will bring
many important benefits when the business wants to achieve profits
quickly in the early years.
ROI NPV
ROI determines the profit gained from an NPV determines the net present value of future cash flows
investment relative to its cost. It reflects the compared to the initial cost. This metric shows whether a
financial effectiveness of an investment. project will generate positive financial value over its lifetime.
Small/medium businesses should consider NPV when
Small and medium businesses should choose
choosing an ERP solution to ensure that the investment
ERP solutions with high ROI to maximize the not only generates short-term profits but also provides
potential of their limited investment capital. long-term financial value.
Large businesses: ROI might not always be the Large businesses can use NPV to compare long-term
most important factor; long-term scalability and investment options and ensure that significant
support are key decision-making factors. investment costs will yield high financial value.

Conclusion
Payback Period determines the time required to EVA determines the economic value added by a
recover the initial investment. It is an important business after accounting for the cost of capital.
metric for evaluating how quickly an investment It measures the ability to generate profits above
pays back its cost. the cost of the invested capital.
Small/medium businesses should look for ERP Small businesses should focus on metrics like ROI and
solutions with a short Payback Period to reduce Payback Period rather than EVA, as they need to
financial risk and enable quick reinvestment. optimize short-term profits and recover capital quickly.
Large businesses may accept a longer payback Large businesses should emphasize EVA to ensure that
period if they expect long-term growth and large investments not only generate profits but also
advanced system features. create value beyond the cost of invested capital.

Payback Period EVA

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