Evaluating Financing Strategies Assignmen
Deliverable 4 – Evaluating Financing Strategies
Assignment Content
- Competency
Evaluate financing strategies for business operations.Student Success Criteria
View the grading rubric for this deliverable by selecting the “This item is graded with a rubric” link, which is located in the Details & Information pane.Scenario
You are the manager of a business analysis team for Resources as Needed (RAN), a consulting firm. RAN supports other companies with experienced consultants for short-term projects in areas such as information technology, accounting, and change management. RAN’s executive leadership is requesting daily information and analysis around various financial metrics such as revenue earned, hours worked, profitability by client, etc. The executive team also provided a list of desired capabilities which includes a dashboard with real-time data summarizing the metrics for ease of viewing and use.After reviewing the capabilities of your current financial software systems, you have determined that new software will be needed to support the request. Your team researched the software market and determined three possible options, each with a different pattern of cash flows.
- The first option is to build a custom program using internal resources. There are experienced consultants in your firm that could do the work. However, the consultants would be unavailable for client projects during the build, so their wages would be a direct cost (unreimbursed with no profit margin) to your firm. The build project will take approximately 9 months and will require some annual maintenance. The expected result is a tool that meets all aspects of the executive team’s request.
- The second option is to purchase an off-the-shelf software program. The installation will require consulting resources for 1 month and has no annual maintenance; however, upgrades to new versions are likely every other year. The best off-the-shelf option identified is expected to meet 90% of the executive team’s request.
- The third option is to subscribe to a software program that is available via internet access (i.e. in the cloud). This subscription model, known as software as a service or SaaS, requires a one-time start-up payment, then regular monthly access payments. Start-up will take 1 month, and no internal consulting resources are needed as all work is handled by the vendor. The monthly access payment ensures that your firm is using the latest version of the software as released. The current version is expected to meet 90% of the executive team’s request.
- Over a 10-year project life, the total cash outflow of all three options is similar. However, the year-by-year cash flow patterns differ for each option as do the operational and strategic implications of each.
Instructions
Using financial data such as the cash flow and metrics provided, evaluate the financing implications for the firm’s income statement from each option.EFS-Scenario.xlsx
Write an email to the executive team summarizing your evaluation. The summary must include a comparison of the financing implications and any strategic, operational, or other non-financial factors considered as well as the recommended option with justification.
Resources
- Cash Flow and Metrics
- EFS-Scenario.xlsx
- For assistance on writing a professional email,
Summary
| Cash Flow Comparisons* | Net Present Value Comparisons | ||||||||
| Cash Flow | Net Present Value | vs Opt 1 | vs Opt 2 | vs Opt 3 | vs Opt 1 | vs Opt 2 | vs Opt 3 | ||
| Option 1 – Develop Internal Software | $ (2,346,462) | $ (1,796,369) | $ 606 | $ 636 | $ (372,392) | $ (627,318) | |||
| Option 2 – Purchase Off the Shelf Software | $ (2,347,067) | $ (1,423,977) | $ (606) | $ 31 | $ 372,392 | $ (254,926) | |||
| Option 3 – Software as a Service (SaaS) | $ (2,347,098) | $ (1,169,051) | $ (636) | $ (31) | $ 627,318 | $ 254,926 | |||
| *All absolute variances are less than 0.05% of base value |
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Evaluating Financing Strategies
| Inflation years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | ||||||||
| Option 1 – Develop Internal Software | Description | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | Company Factors (All Options) | |||||
| Start-up delay | 9 months | Start-up consultant costs | $ (1,663,200) | Discount rate | 15% | ||||||||||||
| Number of consultants | 7 | Depreciation adjustment for tax | $ 1,580,040 | $ (332,640) | $ (332,640) | $ (332,640) | $ (332,640) | $ (249,480) | Income tax rate | 25% | |||||||
| Consultant hours by month | 1120 | Maintenance consultant costs | $ (96,773) | $ (98,708) | $ (100,682) | $ (102,696) | $ (104,750) | $ (106,845) | $ (108,982) | $ (111,161) | $ (113,384) | Consultant wage rate | $ 150.00 | ||||
| Annual maint hours | 575 | Loss of margin on client projects | $ (332,640) | $ (19,355) | $ (19,742) | $ (20,136) | $ (20,539) | $ (20,950) | $ (21,369) | $ (21,796) | $ (22,232) | $ (22,677) | Consultant benefit % | 10% | |||
| Deprecation life | 5 years | Income tax | $ 103,950 | $ 112,192 | $ 112,772 | $ 113,365 | $ 113,969 | $ 93,795 | $ 32,053 | $ 32,694 | $ 33,348 | $ 34,015 | Consultant margin % | 20% | |||
| Net cash flow excl depreciation | $ (1,891,890) | $ (3,935) | $ (5,677) | $ (7,454) | $ (9,266) | $ (31,905) | $ (96,160) | $ (98,083) | $ (100,045) | $ (102,046) | Inflation rate on wages | 2% | |||||
| Depreciation adjustments to income | |||||||||||||||||
| Net present value | $ (1,796,369) | tax are calculated on a straight-line | |||||||||||||||
| Total cash flow | $ (2,346,462) | basis for this analysis | |||||||||||||||
| Option 2 – Purchase Off the Shelf Software | Description | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | ||||||
| Purchase cost | $ 1,000,000 | Purchase & upgrade costs | $ (1,000,000) | $ (500,000) | $ (500,000) | $ (500,000) | $ (500,000) | ||||||||||
| Start-up delay | 1 month | Depreciation adjustment for tax | $ 500,000 | $ (500,000) | $ 250,000 | $ (250,000) | $ 250,000 | $ (250,000) | $ 250,000 | $ (250,000) | $ 250,000 | $ (250,000) | |||||
| Number of consultants | 2 | Consultant costs | $ (49,500) | $ (13,733) | $ (14,288) | $ (14,865) | $ (15,466) | ||||||||||
| Consultant hours month 1 | 300 | Loss of margin on client projects | $ (9,900) | $ (2,747) | $ (2,858) | $ (2,973) | $ (3,093) | ||||||||||
| Bi-annual upgrade cost | $ 500,000 | Income tax | $ 139,850 | $ 125,000 | $ 66,620 | $ 62,500 | $ 66,786 | $ 62,500 | $ 66,960 | $ 62,500 | $ 67,140 | $ 62,500 | |||||
| Bi-annual maint hours | 80 | Net cash flow excl depreciation | $ (919,550) | $ 125,000 | $ (449,860) | $ 62,500 | $ (450,359) | $ 62,500 | $ (450,879) | $ 62,500 | $ (451,419) | $ 62,500 | |||||
| Deprecation life | 2 years | ||||||||||||||||
| Net present value | $ (1,423,977) | ||||||||||||||||
| Total cash flow | $ (2,347,067) | ||||||||||||||||
| Option 3 – Software as a Service (SaaS) | Description | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | ||||||
| Start-up payment | $ 125,000 | Start-up costs | $ (125,000) | ||||||||||||||
| Start-up delay | 1 month | Monthly costs | $ (242,000) | $ (271,920) | $ (280,078) | $ (288,480) | $ (297,134) | $ (306,048) | $ (315,230) | $ (324,687) | $ (334,427) | $ (344,460) | |||||
| Monthly payment | $ 22,000 | Income tax | $ 91,750 | $ 67,980 | $ 70,019 | $ 72,120 | $ 74,284 | $ 76,512 | $ 78,807 | $ 81,172 | $ 83,607 | $ 86,115 | |||||
| Annual inflation on costs | 3% | Net cash flow | $ (275,250) | $ (203,940) | $ (210,058) | $ (216,360) | $ (222,851) | $ (229,536) | $ (236,422) | $ (243,515) | $ (250,820) | $ (258,345) | |||||
| Net present value | $ (1,169,051) | ||||||||||||||||
| Total cash flow | $ (2,347,098) |
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,
Criterion 1
A – 4 – Mastery
Provided an in-depth evaluation of the financing implications for the firm’s income statement and balance sheet from each option
Criterion 2
A – 4 – Mastery
Interpreted a comparison of the financing implications and any non-financial factors considered as well as the recommended option with justification.
Criterion 3
A – 4 – Mastery
Included an extensive Excel file using financial data such as the cash flow and metrics; created a properly formatted email to the executive team summarizing the evaluation.
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