The total cost of ownership is equal to the total sum of all cash inflows.
That is 2,306,729* 3= 6920,187, considering the total cash inflow for all the project lifetimes are uniform in this case, we multiple the cash inflow directly to the project lifetime.
Average annual cost of ownership
It is given by dividing the total project cost of ownership by the lifetime years of the project
I.e Average annual cost of ownership = 6,920,187 divide by 3 =2,306,187
NPV= discounted net cash flows- initial capital outlay + salvage value
Details Y0 Y1 Y2 Y3
ROI (129,981) 2,127,129 2,127,129 2,127,129
Add back depreciation (224,000) 44,800 44,800 44,800
Net cash inflow -353,981 2,171,929 2,171,929 2,171,929
PVIFA,15% discounting rate 22832 NPV for 3 years. (2,171,929 * 2.2832)-353,981 NV 4,604,967 Question E
Payback in years
Initial cost 353,981
ROI Y1 =2,127,129, payback period in years = 353,981 divide by 2,127,129= 0.1664 years
This project has very short payback period of 0.1664 years
The project decision of acceptance is based on various criterion, this are techniques that enable an investor to made a sound investment decision
According to the payback period creation, ARE. Co. should take the project since in two months time the investment recoup all the investments cost
When using the NV technique of accessing a project the decision rule is that when NPV<0, reject
This ARE net initiative has a favorable NPV and a high one, hence we advise the management to take it.
CATEGORIES OF BENEFITS:
These are the benefits which reduce the cost of operation, and do not affect the revenues per se.
Reduced administrative overheads: since it has substituted the needs of a direct international access administrator, this has a direct impact on the cost of the ARE hence the profits margin increases.
Reduced recruiting efforts for publishers. The cost of training the web publishers significantly reduce, this does affect the revenues directly.
These are the projects features that results to increased revenue or cash inflow directly.
Increasing the IT staff productivity- ARE. Co. Major businesses are transacted online hence when the IT staff productivity increases, eventually the company records increased revenues.
Increased web manager Productivity: The web managers have ease time to fix significant complains recorded hence more customers are satisfactorily served hence higher revenues.
Increased web publisher Productivity: less time is used to produce content, here in the rate of customer served increases, hence the revenues.
Increased visibility and access: the desirable compatibility of the website and its internal search tools with the search engines and Web crawlers reduced web delays and complicity to access. This increased the customer base directly translating to higher revenues.
Importance of calculating Cost of Ownership:
-Cost of ownership is a management accounting technique which provide the management with analysis of the benefits of prospective investment.
-Justifies for the decision to accept or reject a project.
Approach of calculating indirect saving:
The indirect returns like productivity are recognized by taking a structured approach to measurement the indirect ROI drives and employing concepts like Productivity correction factors and the inefficient transfer of time.
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