nucleus_roi.xls

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INTRODUCTIONThis workbook has been developed to evaluate the value of a supply chain managementtechnology decision. It is designed to be used with the Nucleus Research methodology to help you

build a business case and support your technology decision by evaluating the real impact to thebottom line. Using the navigation buttons above or tabs at the bottom of the workbook, you'll go

to areas of the workbook where you can enter appropriate cost and benefit information. You maythen print a detailed report showing the financial results.

Calculations such as return on investment (ROI), total cost of ownership (TCO), payback period,and net present value (NPV) are calculated and may be used to either select the best solution ornegotiate better terms on a solution that may have the wrong cost structure.

INSTRUCTIONSIf this is your first time using the tool, consider visiting the tutorial using the button above.:: Navigate the workbook using the numbered buttons above, starting at step 1 to enter the cost

information then step 2 to enter benefit information.:: At each step, scroll through the worksheet entering data in appropriate cells (light gray cellsare calculated automatically).:: You may edit cost and benefit line descriptions and delete sample entries to meet yourorganization's particular situation.:: After completing steps 1 and 2, go to step 3 to view the detailed financial analysis.:: Step 4 provides a complete report and risk assessment.

ABOUT NUCLEUS RESEARCHNucleus is a global research firm providing technology research advisory services that include in-

depth analysis, tools, and analyst access to help companies make the best technology decisions.

Nucleus Research is registered with the National Association of State Boards of Accountancy#108024.

TOOL VERSION 2007.1

FINANCIAL ANALYSIS TOOLSupply Chain Management

Corporate Headquarters

Nucleus Research Inc.

36 Washington Street

Wellesley MA 02481

Phone: +1 781.416.2900

Fax: +1 781.416.5252

Nucleus Research Inc.

www.NucleusResearch.com

Copyright Nucleus Research

Incorporated, all rights reserved.This financial modeling tool may not beredistributed or modified in any way.

FOR INDIVIDUAL END-USER USE ONLY


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Nucleus Research, Inc.


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Table 1. Summary Results

Expected Case

Annual return on investment (ROI) #DIV/0!

Payback period (years) 3+

Net present value (NPV) 0

Average annual cost of ownership 0

Total 3-year benefits 0

EXECUTIVE SUMMARY

This report has been created to detail the financial results expected from the proposed supply chainproject. The results in this report are based on the projected costs associated with the project and the

reasonably expected benefits derived over a 3-year period. Table 1 shows a summary of the financial

results.

RISK ASSESSMENT

The financial results outlined in Table 1 provide measurements to quantify the expected results from thesupply chain project and its potential impact on the bottom line. These results are also useful in assessingthe level of risk associated with the project. Table 2 shows the evaluation of three types of risk on a scale oflow, medium, and high. These risks are:

Investment Rate - Investing in anything involves the use of capital in the hopes of gaining a returngreater than the cost of the capital employed. However, ensuring that the return exceeds the cost of capitalis only half of the picture: the return must exceed the cost of capital by an amount that adequatelycompensates the company for the risk of undertaking the project. For example, a company with a 15% costof capital would be ill advised to undertake a very risky project that returns only 16% to the company. Thenet 1% gain is unlikely to compensate the company for undertaking even the most risk-free project.

The investment score measures the ratio of ROI to cost of capital, which is a more accurate assessment ofthe relative return of a project. The report generates a high risk score when the ROI is less than twice thecost of capital and a low risk score when it is more than 4 times the cost of capital.

Capital Recovery - Making a decision to deploy a new technology at any point in time implies making anestimate about the pace of technology change. Market events, new technologies, and new products canquickly render even the most effective solution obsolete. However, obsolescence is not the only risk. New

technology can create areas of competition along with new areas of opportunity. Having the flexibility todiscard a solution for a new one that may offer even greater returns is an important competitive weapon.Projects that provide enough benefits in early years to cover costs allow for this flexibility.

The capital recovery score is a measurement of the payback period the amount of time needed for thebenefits from a project to outweigh the costs. A project with payback period of less than one year provides

a low risk while more than two years indicates a high risk.

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Page 4

Table 2. Risk Assessment

Investment rate #DIV/0!

Capital recovery HIGH RISK

Variance potential #DIV/0!

Table 3. Expensed Costs Pre-start Year 1 Year 2 Year 3

Software 0 0 0 0

Hardware 0 0 0 0

Consulting 0 0 0 0

Personnel 0 0 0 0

Training 0 0 0 0

Other 0 0 0 0

Total 0 0 0 0

Variance Potential - The financial results listed in this report are based on estimates of future costs andbenefits. However, it is unlikely that these estimates will exactly match actual costs and benefits. Indirect

benefits tend to be the most susceptible to small errors in estimates that can result in large changes in the

actual return. The variance potential score evaluates the indirect benefits as a percentage of the totalbenefits listed. Indirect benefits amounting to more than 90 percent of the total generate a high score;those amounting to less than 50 percent generate a low risk score.

COSTSTable 3 shows the expensed costs associated with the deployment of the solution. Costs include both one-time and ongoing or recurring costs. When appropriate, costs have been increased to account for additionalusers or extended deployment. When required, maintenance costs have been included as a recurring costunder either software or hardware.

The following methodology was used to gather costs::: Everything that is directly and exclusively associated with the project has been included at 100

percent.:: Purchases that are partially driven by this specific project have been included at a percentage

representing the extent to which the project drove the expenditure.:: General infrastructure items not associated with the project were not included.


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Table 4. Capitalized Assets Pre-start Year 1 Year 2 Year 3

Software 0 0 0 0

Hardware 0 0 0 0

Project consulting 0 0 0 0

Project personnel 0 0 0 0

Total 0 0 0 0

Table 5. Depreciation Schedule Pre-start Year 1 Year 2 Year 3

Software 0 0 0 0

Hardware 0 0 0 0

Project consulting 0 0 0 0

Project personnel 0 0 0 0

Total 0 0 0 0

Figure 1. Total 3-Year Costs

Software 0

Hardware 0

Consulting 0

Personnel 0

Training 0

Other 0

Table 4 lists additional project costs that will be capitalized. Table 5 lists the depreciation during the 3-yearperiod using a 5-year MACRS schedule.

Figure 1 shows the total 3-year costs by category. Average and total cost of ownership per year may befound in Figure 2. These costs have not been balanced against benefits and are appropriate for use in long-term budgeting and planning.


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Page 7

Figure 2. Total Cost of Ownership

Average Total

Initial cost 0 0

Year 1 0 0

Year 2 0 0

Year 3 0 0

Table 6. Summary of Benefits Pre-start Year 1 Year 2 Year 3

All Direct 0 0 0 0

All Indirect 0 0 0 0

Total 0 0 0 0

Initial cost Year 1 Year 2 Year 3

0

0

00

0

1

1

1

1

1

1

Average

BENEFITS

Benefits from this deployment are shown in Table 6. There are two types of benefits indicated: direct andindirect. Direct benefits of the application may include items such as saving paper costs, reducing accountsreceivable, limiting express mail, reducing staff, and selling old hardware. Direct benefits can be thought ofas the savings you can "touch."

Examples of indirect savings include "reducing the time needed to test new software by 25 percent" or "thesales process workflow takes 1 day rather than 2 weeks." These are benefits that involve a change in anontangible item such as productivity or efficiency. The expectation is that this change will manifest itself asan increase in work and thus eventual revenue for the company.

One important point of caution is not to double-count the value of productivity. A change in productivity

results in a measurable change in output, and therefore a change such as an increase in revenue canreasonably be assumed as the result of the productivity change. If there is a measurable change, it shouldbe included as a direct benefit.


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Table 7. Select Direct Benefits Pre-start Year 1 Year 2 Year 3

Table 8. Select Indirect Benefits Pre-start Year 1 Year 2 Year 3

Figure 3. Total 3-Year Benefits

All Direct 0

All Indirect 0

The total 3-year benefits by category are indicated in Figure 3. As noted under the section on risk, the ratio

of direct to indirect benefits is an indicator of the potential variability of the expected results. Caution isurged when direct benefits make up less than 10 percent of the total benefits. Figure 4 shows thecumulative benefits of the project.


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Page 9

Figure 4. Cumulative Return

Pre-start 0

Year 1 0

Year 2 0

Year 3 0

Table 9. Financial Analysis Results Year 1 Year 2 Year 3

Net cash flow before taxes 0 0 0 0

Net cash flow after taxes 0 0 0 0

Annual ROI - direct and indirect benefits 0% #DIV/0! #DIV/0! #DIV/0!

Annual ROI - direct benefits only 0% #DIV/0! #DIV/0! #DIV/0!

Net present value (NPV) 0 0 0 0

Payback (years) 3+ 3+

Total cost of ownership (TCO) 0 0 0 0

Average annual cost of ownership (TCO/Y) 0 0 0 0

3-year IRR N/A N/A

Table 10. Basic Financial Assumptions

All government taxes 50%

Cost of capital 15%

DETAILED FINANCIAL RESULTS

Table 9 shows the detailed financial calculations and Table 10 indicates the basic financial assumptionsused. The effect of various discount rates on the NPV can be found in Figure 5.

Pre-start Year 1 Year 2 Year 3

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1


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APPENDIX

UNDERSTANDING THE METRICS:

ROI - Return on Investment: This is the most important metric to use for evaluating a technology

investment and prioritizing projects within your company. With ROI, you get an in-depth look at how mucheach dollar spent will yield in returns.

Payback Period: This metric determines the time needed for benefits returned to equal the initial cost of aproject, thereby quantifying the project's risk. Technology solutions with a payback period of less than ayear are considered optimal to a risk-averse investor.

NPV- Net Present Value: This metric quantifies the value of the ongoing benefits discounted back to thepresent year. This traditional textbook metric takes into account the time value of money when assessingbenefits but does not examine the ratio of costs to benefits.

TCO - Total Cost of Ownership: This financial metric is useful for budgeting concerns because it provides aholistic sense of the long-term financial resources required to undertake an investment. TCO, however,does not take a project's benefits or savings into account, so if you use TCO for project comparison, you're

only seeing half of the picture.

IRR - Internal Rate of Return: IRR calculates the effective interest rate of a project at which your project'scash flows would have an NPV equal to zero. However, IRR is built on dubious assumptions that prevent itfrom being a valid comparison metric. If an internal return metric is required by your company, considerusing MIRR as an alternative.

cROI- Cumulative ROI: This marketing metric provides a cumulative ROI measurement over a three yearperiod. By summing the benefits over three years (as opposed to averaging them) cROI creates an inflatedReturn on Investment assessment with no direct correlation to actual cash flows. It is important that youknow the difference so that you will be able to spot, and discard, a phony cROI measurement whenevaluating your technology investments. Notice the fundamental difference between ROI and cROI:

UNDERSTANDING A BAD ROI:

If your initial calculations yield an ROI less than expected, consider the following:

Change cost timing: Move costs out of the initial year by spreading your variable costs.

Negotiate on price: Small decreases in cost can drastically increase your ROI.Ramp cost with employees: Try gradually increasing the costs for training and other areas as employeesbegin using the technology.Change deployment strategy: Use the technology to support a small, key return group first, or tryoutsourcing. The technology can be more broadly deployed later.Re-examine your correction factors: If you've been too conservative in your correction factors andproductivity gains estimates, you may be influencing a bad decision.

( )1

net year 1 net year 2 net year 3 *3 *100

initial costROI

+ +

=

year 1 year 2 year 3*100

initial cost

NPV NPV NPVcROI

+ +

=vs.


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Figure 5. Sensitivity Analysis

Discount Rate NPV

5% 0

10% 0

15% 0

20% 0

25% 0

5% 10% 15% 20% 25%

0

0

0

0

0

1

1

1

1

1

1


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Company Name

SUMMARY

Project: Supply Chain

Annual return on investment (ROI)

Payback period (years) 3+

Net present value (NPV) 0

Average yearly cost of ownership 0

ANNUAL BENEFITS Pre-start Year 1 Year 2 Ye

Direct 0 0 0

Indirect 0 0 0

Total per period 0 0 0

CAPITALIZED ASSETS Pre-start Year 1 Year 2 Ye

Software 0 0 0

Hardware 0 0 0

Project consulting and personnel 0 0 0 Total per period 0 0 0

DEPRECIATION SCHEDULE Pre-start Year 1 Year 2 Ye

Software 0 0 0

Hardware 0 0 0

Project consulting and personnel 0 0 0


EXPENSED COSTS Pre-start Year 1 Year 2 YeSoftware 0 0 0

Hardware 0 0 0

Consulting 0 0 0

Personnel 0 0 0

Training 0 0 0

Other 0 0 0


FINANCIAL ANALYSIS Results Year 1 Year 2 Ye

Net cash flow before taxes 0 0 0

Net cash flow after taxes 0 0 0

Annual ROI - direct and indirect benefits #DIV/0! #DIV/0! #DIV

Annual ROI - direct benefits only #DIV/0! #DIV/0! #D

Net Present Value (NPV) 0 0 0

Payback (Years)

Average Annual Cost of Ownership 0 0 0

3-Year IRR Err:523

FINANCIAL ASSUMPTIONS

All government taxes 50%

Cost of capital 15%

Financial modeling tool, format, and methodology copyright Nucleus Research Inc., all rights reserved.



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Basic Financial Information

PROJECT INFORMATION

Your company or group name: Company Name

Project name: Supply Chain

Date project starts: 6/1/2007

FINANCIAL ASSUMPTIONS

Tax rate: 50%

Cost of capital: 15%

Depreciation method: 5-year straight-line

Cost Calculations

INITIAL QUESTIONS TO DETERMINE PROJECT COSTS

How many software licenses are you purchasing? licenses

What is the cost per license? 0

TRUE

What is the annual maintenance rate for the software you are purchasing? 0%

What is the cost of hardware purchased for the project? 0

TRUE

What is the initial cost of consulting for the project? 0

How many total hours will IT staff spend on the project? hours

What is the average annual fully loaded salary of your IT staff? 0

How many IT staff will be assigned to ongoing system maintenance? .0 employees

How many users will receive formal training on the new system? employees

How many hours will the average user spend in training sessions? .0 hours

What is the average annual fully loaded cost for those users? 0

What fees will you pay for the training sessions? 0

In this section, enter the basic information about the project and the assumptions about the tax rate anddiscount rate.

In this section we ask a few questions to help you get started assessing the cost of the supply chain project.The areas you fill in here will automatically populate the detailed cost sections below. If you have moredetailed information, you can enter it in the detailed cost sections below.

In this section we ask a few questions to help you get started assessing the cost of the project.

Now you can enter any detailed cost information that you did not include above. Enter the actual andexpected costs associated with the purchase and deployment of the project and add any additional items byusing the blank description areas or inserting new lines.

Use the following methodology to gather costs: :: Everything that is directly and exclusively associated with the project should be included at

100 percent. :: Purchases that are partially driven by this specific project should be included at a

Check here if this is a capital expense that should be depreciate

Check here if this is a capital expense that should be depreciate


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SOFTWARE - EXPENSED Pre-start Year 1 Year 2 Year 3 Totals

Product license charges 0 0 0 0 0

Product per-user charges 0 0 0 0 0

Database 0 0 0 0 0

Operating system software 0 0 0 0 0

Additional server software 0 0 0 0 0

Additional network software 0 0 0 0 0

Other 0 0 0 0 0

Maintenance fees 0 0 0 0 0

TOTAL SOFTWARE - EXPENSED 0 0 0 0 0

SOFTWARE - CAPITALIZED Pre-start Year 1 Year 2 Year 3 BookCapital purchases - from above 0 0 0 0 0

Capital purchases - Initial year 0 0 0 0 0

Capital purchases - First year 0 0 0 0

Capital purchases - Second year 0 0 0

Capital purchases - Third year 0 0

TOTAL SOFTWARE - DEPRECIATED 0 0 0 0 0

HARDWARE - EXPENSED Pre-start Year 1 Year 2 Year 3 Totals

Server hardware costs 0 0 0 0 0

Network upgrades 0 0 0 0 0

Additional desktop hardware 0 0 0 0 0

Other 0 0 0 0 0

Maintenance fees 0 0 0 0 0

TOTAL HARDWARE - EXPENSED 0 0 0 0 0

HARDWARE - CAPITALIZED Pre-start Year 1 Year 2 Year 3 Book

Capital purchases - from above 0 0 0 0 0

Capital purchases - Initial year 0 0 0 0 0

Capital purchases - First year 0 0 0 0

Capital purchases - Second year 0 0 0

Capital purchases - Third year 0 0

TOTAL HARDWARE - DEPRECIATED 0 0 0 0 0

SOFTWARESoftware costs for any project include license fees for the product as well as license fees for any supportsoftware that may be required or upgrades of existing applications needed. Other costs may include operatingsystems or other desktop upgrades and network software changes. Enter the costs in either the expense

section or the depreciation section if this is a capital expense. If you are outsourcing your deployment, enterthe yearly cost below.

HARDWAREHardware costs include servers purchased to support the application and any additional networking or

security hardware required as part of the deployment. You should also include the costs for any new desktopsystems or upgrades to existing systems, depending on the type of project. Additional hardware may be

needed to support databases or connectivity. Enter the costs in either the expense section or thedepreciation section if this is a capital expense.


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CONSULTING - EXPENSED Pre-start Year 1 Year 2 Year 3 Totals

Third-party consulting 0 0 0 0 0

Deployment and upgrade consulting 0 0 0 0 0

Integration 0 0 0 0 0

Future project based 0 0 0 0 0

Other 0 0 0 0 0

TOTAL CONSULTING 0 0 0 0 0

CONSULTING - CAPITALIZED Pre-start Year 1 Year 2 Year 3 Book

Capital cost - Initial year 0 0 0 0 0

Capital cost - First year 0 0 0 0

Capital cost - Second year 0 0 0Capital cost - Third year 0 0

TOTAL CONSULTING - DEPRECIATED 0 0 0 0 0

PERSONNEL Pre-start Year 1 Year 2 Year 3 Totals

Initial

Management 0 0 0 0 0

IS 0 0 0 0 0

Employee staff 0 0 0 0 0

Ongoing

Administrators 0 0 0 0 0

IS 0 0 0 0 0

Management 0 0 0 0 0

Accounting 0 0 0 0 0

Other 0 0 0 0 0

TOTAL PERSONNEL 0 0 0 0 0

PERSONNEL - CAPITALIZED Pre-start Year 1 Year 2 Year 3 Book

Capital cost - Initial year 0 0 0 0 0

Capital cost - First year 0 0 0 0

Capital cost - Second year 0 0 0

Capital cost - Third year 0 0

TOTAL PERSONNEL - DEPRECIATED 0 0 0 0 0

CONSULTINGIn this section enter the costs for consulting, including the cost of contractor labor and professional servicesengagements. Commonly, the greatest project consulting needs fall in the pre-start period and first year.Later years usually show a decrease in consulting charges. You may be able to treat some of the initialconsulting as a capital expense. If so, enter the expense in the depreciation section.

PERSONNELPersonnel costs associated with any project can be broken into three main categories: project planning andmanagement (likely to occur in the initial phase and the first part of year one), technical development and

testing (likely to occur as new phases of the project are completed and launched), and ongoing support andmaintenance (on an ongoing basis for as long as the application is used). You may be able to treat some ofthe initial personnel costs as a capital expense. If so, enter the expense in the depreciation section.To calculate the cost of an employee, use the number of hours worked on the project times the fully loadedcost per hour.


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FIA

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FIA

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Graphs

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