ILLUSTRATION OF A TYPICAL ROI CALCULATION OF AN IT PROJECT

0
COSTS
M1
M2
FIXED COSTS
HARDWARE
100
COTS
400
DEV
2500
OPEX
BADNWIDTH
50
OTHERS
300
INDIRECT
FTE
500
Investment
3850
Returns
1900
RETURNS
COST SAVINGS
500
REDUCED COSTS
300
REVENUE INCREASE
100
PRODUCTIVITY INCREASE
1000

2
M3

0
0
2500

0
0
2500

50

50

500
3050
2000

500
3050
2000

500
300
200
1000

500
300
200
1000

NPV
LET'S ASSUME THE DISCOUNTING IS THE PLR - 10%
35
DF=
1
1.35
1.8225
DCF PV
3850 2259.259 1673.525
TOTAL PV=
11235.01
DCF OF PV RETURNS
TOTAL PV=

1900 1481.481 1097.394

11423.63

NPV=

188.61

IS THIS INVESTMENT GOOD OR BAD??

IRR FOLLOWS THE SAME PATTERN, JUST THAT THE INTEREST RATE HERE IS THE OPPORTUNITY COS
FOR BREAK EVEN ANALYSIS, LOOK AT THE GRAPH

3
M4

4
M5

5
M6

6
M7

7
M8

8
M9

9
M10

10
M11

0
0
2500

0
0
2500

50
0
2500

0
0
500

0
0
500

0
0
500

100
0
500

0
0
500

50

50

100

100

100

100

100

100

500
3050
2100

500
3050
2800

500
3150
3800

500
1100
4800

500
1100
5800

500
1100
6800

500
1200
11800

500
1100
13800

500
300
300
1000

500
300
1000
1000

500
300
2000
1000

500
300
3000
1000

500
300
4000
1000

500
300
5000
1000

500
300
10000
1000

500
300
12000
1000

2.460375 3.321506 4.484033 6.053445 8.172151 11.0324 14.89375 20.10656

1239.648 918.2581 702.4925 181.7147 134.6035 99.70629 80.57074 54.70852

853.5284

842.991 847.4513 792.9369 709.7275 616.3661 792.2789 686.3433

25000

ESTMENT GOOD OR BAD??

IS THE OPPORTUNITY COST OF CAPITAL OF THE FIRM

20000
15000
10000
5000
0
1

11
M12
0
0
500
100

500
1100
21800
500
300
20000
1000

27.14385
40.52483

803.1285

00

00

00
Investment
Returns

00

00
0
1

10

11

12

ILLUSTRATION OF A TYPICAL ROI CALCULATION OF AN IT PROJECT

0
1
COSTS
M1
M2
M3
FIXED COSTS
HARDWARE
100
0
COTS
400
0
DEV
2500
2500
OPEX
BADNWIDTH
50
50
OTHERS
300
INDIRECT
FTE
500
500
3850
3050
1900
2000
RETURNS
COST SAVINGS
500
500
REDUCED COSTS
300
300
REVENUE INCREASE
100
200
PRODUCTIVITY INCREASE
1000
1000

3
M4

0
0
2500

0
0
2500

50

50

500
3050
2000

500
3050
2100

500
300
200
1000

500
300
300
1000

NPV
LET'S ASSUME THE DISCOUNTING IS THE PLR - 10%
36
DF=
1
1.36
1.8496 2.515456
DCF PV
3850 2242.647 1649.005 1212.504
TOTAL PV=
11081.98
DCF OF PV RETURNS
TOTAL PV=

1900 1470.588 1081.315 834.8387

11054.96

-27.02 IS THIS INVESTMENT GOOD OR BAD??

NPV=
IRR=
IRR FOLLOWS THE SAME PATTERN, JUST THAT THE INTEREST RATE HERE IS THE OPPORTUNITY COST O
FOR BREAK EVEN ANALYSIS, LOOK AT THE GRAPH

4
M5

5
M6

6
M7

7
M8

8
M9

9
M10

10
M11

11
M12

0
0
2500

50
0
2500

0
0
500

0
0
500

0
0
500

100
0
500

0
0
500

0
0
500

50

100

100

100

100

100

100

100

500
3050
2800

500
3150
3800

500
1100
4800

500
1100
5800

500
1100
6800

500
1200
11800

500
1100
13800

500
1100
21800

500
300
1000
1000

500
300
2000
1000

500
300
3000
1000

500
300
4000
1000

500
300
5000
1000

500
300
10000
1000

500
300
12000
1000

500
300
20000
1000

3.42102 4.652587 6.327519 8.605426 11.70338 15.9166 21.64657 29.43933

891.5469 677.0426 173.8438 127.8263 93.98995 75.39301 50.81637 37.36497

818.4693 816.7498 758.5912 673.9934 581.0288 741.3646 637.5144 740.5059

GOOD OR BAD??

HE OPPORTUNITY COST OF CAPITAL OF THE FIRM

25000
20000
15000
10000
5000
0
1

Row 13
Row 14

10

11

12

Total No. of months

Month
Expense(investment)
Interest rate p.a.
Present Value
Net Present Value
No. of months
Months
Hardware
AMC/AMC Of Hardware
Liscence
AMC/AMC Of liscence
Implementaion cost
Discount rate
Bandwidth
Sum total of each month
Present value
Net present value

12
0
10
24%
10
89.2944

1
0

2
0

35
7.7
0

24

12%

0
20
2.4

22%
31.25
17.50%

3
3
3
56.65
45.7
3
56.65 45.04312 2.914378
261.5569

3
45

4
3

42.40451 2.771536

5
0

6
18

7
0

8
5

9
6

10
0

0 15.98348

0 4.267452 5.020532

10

31.25

31.25

31.25

3
3
3
3
3
3
3
3
34.25
3
3
34.25
3
3
34.25
3
32.79423 2.831199 2.790504 31.40033 2.710861 2.671895 30.06568 2.595637

11
11

12
0

8.846893

11

12

13

14

15

16
8
0.96

17

18

12
2.64
0

3
3
3
3
3
3
3
3
3
3
3
3
3
11.96
17.64
3
2.558328 2.521556 2.485312 2.449588 2.414379 9.486972 13.79137 2.311757

19

20

21

22

23

3
3
3
3
3
3
3
3
3
3
2.278529 2.245778 2.213498 2.181681 2.150323

Investments
No. of months
Months
Hardware
AMC/AMC Of Hardware
Liscence
AMC/AMC Of liscence
Implementaion cost
Discount rate
Bandwidth
Sum total of each month
Present value
Net present value

24

12%

0
20
2.4

22%
31.25
17.50%
3
56.65
56.65
285.7

Returns
Months
No. of months
Cost savings
Salary cost of employees
Productivity value addition
Profitability from customers
Sum total of benefits
Present value of benefits
Net present value

0
24
0
2500
0
0
0
0
68455.573796

35
7.7
0

31.25

31.25

3
45.7
45.7

3
3
3

3
34.25
34.25

3
3
3

3
3
3

3
34.25
34.25

3
3
3

3
3
3

0
20
20
20
20
20
2500
2500
2500
2500
2500
2500
0
0
0
0
0
0
0
0
0
0
0
0
0
20
20
20
20
20
0 19.42918 19.14991 18.87466 18.60336 18.33596

20
20
2500
2500
0
750
0
0
20
770
18.0724 685.7865

10

11

12

13

14

15

16
8
0.96

31.25

3
34.25
34.25

3
3
3

3
3
3

3
3
3

3
3
3

3
3
3

3
3
3

3
11.96
11.96

10

11

12

13

14

15

16

20
20
20
20
20
20
20
20
2500
2500
2500
2500
2500
2500
2500
2500
750
750
750
750
750
750
750
750
0
0
0
1000
2000
3000
4000
5000
770
770
770
1770
2770
3770
4770
5770
675.9292 666.2136 656.6376 1487.71787 2294.771 3078.316 3838.862 4576.909

17

18

19

20

21

22

23

12
2.64
0

3
17.64
17.64

3
3
3

3
3
3

3
3
3

3
3
3

3
3
3

3
3
3

17

18

19

20

21

22

23

20
20
20
2500
2500
2500
750
750
750
6000
7000
8000
6770
7770
8770
5292.945 5987.451 6660.899

20
20
20
20
2500
2500
2500
25
750
750
750
7.5
9000
10000
11000
12000
9770
10770
11770 12027.5
7313.75 7946.456 8559.463 8621.001