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Piedmont Trailer Manufacturing Company Economic Feasibility Analysis for the Custom Order-Tracking System. I would like to thank you for providing me the opportunity to prepare your company’s Economic Feasibility Analysis worksheets. I have compiled the information that you provided into several useful and easy to read charts, diagrams, and explanations. In this memorandum you will find a summary of breakeven points using discount rates of 8, 10, 12, 14, and 16 percent, a breakeven chart comparing the net present value of all benefits to the net present value of all costs, and the internal rate of return.
I also provide analysis of a couple of different scenarios, for example, a scenario summarizing the elimination of a staff position, and another scenario summarizing the elimination of a staff position and some increased site preparation costs. You will also find an analysis offering a convincing case, in the event that management can fund two projects, for the funding of custom order tracking system under multiple conditions. Project feasibility based on discount rates of 8, 10, 12, 14, and 16 percent:
Breakeven chart comparing the net present value of all benefits to the net present value of all costs (at a discount rate of 14%):
If management stipulates that the internal rate of return must be equal to or greater than the discount rate, the project will still be justifiable at all discount rates. At all discount rates (8, 10, 12, 14, and 16 percent), the internal rate of return remains at 17.05 percent. Assuming a discount rate of 14 percent, eliminating an additional staff position of $32,500 drastically affects the economic feasibility assessment. First, the breakeven time drops from 4.54 years to just 3.31 years. Next, it would increase the internal rate of return from 17.05 percent to 28.72 percent. Overall NPV jumps from $27,534 to $139,109.52 Assuming a discount rate of 14 percent, an additional staff position is eliminated, and the site preparation cost increases from $105,250 to $120,000, economic feasibility is affected slightly.
In comparison to the original conditions, this scenario will decrease the breakeven time from 4.54 years to just 3.46 years. It also increases the internal rate of return from 17.05 percent to 26.75 percent. When compared to the previous circumstance (eliminating the staff position and keeping site preparation costs at $105,250) the effects in this scenario are less significant. Internal rate of return drops to 26.75 percent (from 28.72 percent), and the breakeven time in years is virtually the same, at 3.275 years with the increased site preparation costs compared to 3.308 years with site preparation costs of $105,250.Assuming that management has enough money to fund two development projects, based strictly on internal rates of return, management should fund the projects per the decisions and justifications below:
As shown above, management should fund the Human Resource resources project with an internal rate of return of 27.8 percent, and either one of two custom order tracking systems with 28.72 percent or 26.75 percent internal rates of return, as both of these alternatives have internal rates of return higher than the 23.7 percent return of the Forecasting System. Recommendation:
Based upon all of the data, the most ideal situation occurs when we eliminate the additional staff position of $32,500 and keep site preparation costs at $105,250. If you are able to meet those conditions, this project provides a fantastic internal rate of return of 28.72 percent, which management will find very attractive. It also provides a desirable breakeven time, at approximately 3.31 years. Even if we incur the higher site preparation expenses and have to go with that option, we would still see a desirable breakeven point at roughly 3.275 years, and an almost as attractive internal rate of return of 26.75 percent. Good luck in your pitch to management and please let me know if there is anything else I can do to be of assistance in the future.