Investment Assessment for a New Computer

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 Benefits The next stage is to consider the benefits that will emerge as a result of the investment.

The benefits will not be immediate, puts out over a period of time. In this assessment it is assumed that the computer will have a life of three years, after which it will need to be replaced. Therefore, the cost benefit analysis will be based on a three-year period. As the benefits are accumulated over three years, the initial assessment will be based on the annual benefits that will be felt. There are several potential sources benefit; the first the ability of the firm to undertake an e-commerce strategy.

This will increase sales. The development of forecasts will take into account the way in which the sales will be low in the first year and grow, The benefit from the online sales is the net benefit to the firm, measured as the increase in net profit (sales less costs) that is expected to occur as a result of the new strategy facilitated by the computer. This figure also allows for the potential for some traditional customers to move to the online sales medium.

In addition to the e-commerce benefits, there may also be increases in terms of the traditional sales. With the firms' ability to go online, the development of a web page and having a presence on social media may allow for the firm to undertake some cost effective marketing to support gaining traditional customers who will visit the shop. The increase in net profit as a result of these sales is also being included in the benefits.

The ability of the business owner to save time is a convenience, but can be difficult to monetize. However, if a total of 2 hours are saved a week, this may result in the ability to reduce employee hours needed by 1 hours, so this is a cost saved and can be included. It is assumed that 1 employee, at a total cost of $12 per hour, can be calculated as a benefit. It is assumed that wages would be expected to rise by 5% per annum.

The net benefits for each of the three years are shown in table 2. Table 2; Benefits Year 1 Year 2 Year 3 Total Increased net profit from e-commerce sales $500.00 $700.00 $900.00 $2,100.00 Increased traditional sales $120.00 $120.00 $120.00 $360.00 Value of saved time $312.00 $327.60 $343.98 $983.58 Total $932.00 $1,147.60 $1,363.98 $3,443.58 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.