Whirlpool in General, the Estimated

Whirlpool

In general, the estimated benefits of the ERP system are reasonable. The first stated benefit of the system is in working capital reduction. This will occur because the company believes that inventory will be reduced to 29 days from 51 days. This benefit would be applied to the project 12 days each wave. Working capital reduction is normally a cash flow that is considered when evaluating such models. Another benefit that is stated comes from improvements in revenue and margins that will result of the superior tracking mechanisms afforded by the ERP. Improvements in revenue (and net cash flow) are typically included in capital budgeting analysis. Among the other benefits, a reduction in the number of employees should be included, as would a reduction in the warehouse space that the company needs to rent. A reduction in returns would also be a reasonable benefit, although it should be noted that the reduction should only reflect returns due to shipping errors.

On the cost side, the capital equipment would be counted as a reasonable cost. The depreciation expense on that equipment is not counted, as that would lead to double-counting of the cost. However, depreciation expense reduces taxable income. This tax benefit should be included as a benefit in the calculation, calculated with the 40% tax rate that the company faces. The software licenses are also a reasonable cost to be included. The costs associated with the implementation of the system are also perfectly reasonable.

Among the ongoing operational costs, it is reasonable to stagger these costs. They should be counted when they are expected to be recorded. The license fees are also a reasonable cost. There is nothing unreasonable therefore about the expected costs that the company is facing. Based on this assessment, and the assessment of the benefits, with a few minor changes Whirlpool can proceed with the analysis of its investment.

2) at present, Whirlpool is costing out the system through 2007. There are arguments in favor of and against going out further than 2007. It is 1999 now, so 2007 is 8 years into the future. Given that, costs and benefits that far out can be difficult to estimate. As such, there is a case to be made that any estimates that far out should not be included as they are likely to be inaccurate anyway. However, if the project is still ongoing, then the costs and benefits will still be accruing for 2008 and beyond. If that is the case, then the company should consider extended its model to include those future years.