Cost-benefit analysis of a Dell OptiPlex computer investment

Information Technology

Cost Benefit Analyses of a Computer Purchase

In today's commercial environment, it is necessary that small as well as large businesses are able to remain competitive. For every investment there will be an opportunity cost, so it is essential that potential investment are assessed to help with the maximization of value creation. One approach that is frequently used is the cost benefit approach. The cost benefit model measures the costs and the benefits, with the underlying principle that an investment or project should only proceed if the benefits are greater than the costs which will be incurred. If a small business is considering investing in a computer, a cost benefit analysis may help with the assessment to determine if the investment is likely to be beneficial. This will start with the assessment of the costs that will be incurred, and the potential benefits. In this case it is assumed that a business, such as an independent shop, is considering purchasing a computer in order to increase efficiency for counting and record-keeping, as well as facilitate an expansion strategy into e-commerce, allowing the business to sell online.

Costs

The computer selected as satiable for the small business is a Dell OptiPlex mini tower. It is essential that all requirements are considered and not just the cost of the core computer. Taking the figures from the Dell website to following items are assessed as required. The computer is a starting point, but it is also an essay to look at the additional hardware, software and support will be needed. For example, for a computer system it will also be necessary for the business to have a monitor, a speaker to go the monitor, and a printer. As the business will rely on a computer, it is also advisable to ensure there is sufficient technical support, with a service agreement. The costs include an extended warranty for both the computer and printer, and accident insurance so that next a replacement can be made. The software included is Microsoft Office, as well as a three-year Dell data protection and encryption license.

Table 1; Initial Costs

OptiPlex 3020 Tower

$529.00

20-inch monitor

$119.99

Speaker

$20.30

3-year technical support/warranty $91.30

Accident insurance

$34.30

Printer with 3-year warranty

$319.99

Microsoft Office

$195.30

Dell data protection and encryption (3-year license)

$72.80

Installation

$69.30

Total

$1,452.28

Assessment

This would appear to indicate that there is a benefit to the purchase; the benefits are greater than the costs. In this case it appears that there is a $1,991.30 benefit, as shown in table 3.

Table 3; Net benefit of computer purchase

Benefits

$3,443.58

Costs

$1,452.28

Difference

$1,991.30

Net Present Value

The simple calculation indicates that in the investment appears to be worth while, However, this does not take into account the time cost of money; the value of $100 today is not the same as the value tomorrow, due to inflation. Therefore, a cost benefit analysis that does not allow for way that the value of money will erode over time. This may be addressed by looking at the net present value assessment. This is an appraisal that takes the value of money from future years and discounts it into today's terms. The equation starts with the discounting of each years cash flow or benefit. The equitation is PV = FV / (1+r) n. FV is future value/benefit, r is the discount rate, and n is the number of years away from the current time period, in this case years. The benefit levels for each year have already been calculated, the only missing data is the discount rate. For the case of this paper the discount rate applied will be 5%. This can be assessed on the expected inflation rate, and for firms where there is borrowing it may be assessed with the weighted average cost of capital.

The forecast net present value of the project is shown in table 4, where each year's benefits are calculated based on the discount rate, and after they are added together the full cost of the investment is deducted.

Table 4; Net present value

Year

Benefit

Discount factor

Discounted benefit

Year 1

$932.00

1

$932.00

Year 2

$1,147.60

0.952381

$1,092.95

Year 3

$1,363.98

0.907029

$1,237.17

Total present value

$3,262.12

Less initial investment

$1,452.28

Net present value

$1,809.84

This shows that there is still a positive outcome; the benefits are greater than the costs. However, the benefits are not as great as the first calculation due to the time cost of money. It is also important to remember that this net present value is speculative as it is making the assumption of a 5% inflation rate or cost of capital. This can change, and as such there is also the ability to apply a higher level to ensure that there would remain a positive value.

Overall, it would appear that, as long as the increased profit projections are correct, that this would be a wise investment and produce benefits that are far greater than the costs.

The type of business may be changed to suit the students needs www.dell.com, correct on the 12th Jan 2015