CLUB IT
We are living in the era of stiff competition. This implies that in future, the competitive edge would be enjoyed by those businesses that are capable of being efficient in their operations and effective in their strategies. To achieve this, it is important for the organizations to automate their routine tasks as much as possible and focus on what can differentiate them. This becomes even more important for those who are in the service industry. Since the point of production and delivery are both same for service industry in most of the cases, the efficiency of operations is extremely important. The given case is related to Club IT. In the restaurant related business, quickness of service and rapid delivery are significant business success factors. Keeping this in view, one of the partners has therefore suggested implementing the wireless order taking system. This paper is therefore intended to carry out a cost analysis of the acquisition of the wireless order taking system from the financial perspective.
Whenever the cost analysis is carried out, there are two important factors: the inflows and the outflows. In the case, there is only one cash outflow for the wireless order taking system which is the acquisition cost for the system. The cash inflow is actually the cost saving out of it. It is assumed that using this system, there would be the need of one waiter lesser the number of waiters currently working. Thus, the cost for one waiter is saved. The case shows the figures that it cost 10$ per hour for a waiter. The total working hours in a year are 2020 hours. Thus, there is a cost saving of approx 20200 USD. After adding 18% further, it then amounted to 2336 USD. Apparently, it seems that the net cost would be recovered in around 1.5 years. However, the reality is not so, because it is quite common and most basic concept in finance that the value of money does not remain same all the time. Rather, it diminishes with time. It is therefore essential to discount the cash inflows of the future period. As it is given that the cost for money is 7% and the machine will get obsolete in 3 years, therefore the amount of 23836 USD is discounted as an annuity for three years at 7% per annum. This results in the present value of 53011.8 USD. Thus, there is the benefit of 18,011 USD. Or in technical terms, there is positive NPV of 18011 USD. In terms of payback period, the amount incurred would be paid back between 1 year 5 months and one year six months.
To sum up, the financial analysis reveals that given the organization has sufficient resources and the estimates are accurate, the investment in the wireless order taking system is worth investment.
Following is the detail for the financial measures calculation.
Cash Outflow
35,000 USD
Cash Inflow per year (cost saving)
2020 hours * 10$/hour
=20200 * 18% benefits
= 23836 USD
Payback Period
Year 1
= 35000 – 23836 = 11164 USD
Year 2
Monthly cost saving = 23836 / 12 = 1986
Total months of year 2 required
= 11164/1986 = 5.6 months
Total Payback Period
1 year 5 months – 1 year months
NPV @ 7% for 3 years
Cash Outflow
35000 at year 1
Cash Inflow
23836 in year 1, year2 and year3 each
Discounted value of cash inflows
53,011.18$
NPV
$18,011.18
References
Brigham, E., & Houston, J. (2008). Fundamentals of Financial Management. Mason, OH: South-Western College Pub.
