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ROI for new system

 
Ranch Hand
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Hi,

I want to create a ROI analysis for a new system proposal which uses different technologies from the existing system. How to create it any links or templates are highly appreciated.

Thanks.
 
Java Cowboy
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This is not a technical question, but a financial / business question.

You'll have to make an overview of what it costs to build and maintain the new system, compare this what it costs to maintain the old system, and estimate how fast the new system is going to make you how much money, and compare this to how fast the old system is making you money.
 
Rithanya Laxmi
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Thanks. Is there any template to estimate the ROI on the same. Which will be really useful.
 
author
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Rithanya Laxmi wrote:Thanks. Is there any template to estimate the ROI on the same. Which will be really useful.



I have seen some spreadsheets with macros that did this -- some were actually very elaborate. I have seen one where the top of one sheet was an "interview" section, and the bottom of the sheet was the results. It also had other sheets that provided additional types of data, interim results, etc. It looked pretty cool. And there must be some templates for it somewhere on some MS excel/office site.

Henry
 
Rithanya Laxmi
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Thanks. How to use the ROI formula :- (Total benefits - Total Costs/ Total Costs) for a new proposed system? What will be the " Total benefits " & "Total Costs" here? How we can calculate it? Please clarify.
 
Bartender
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that's not how you calculate the return on investments. You have to take the times of all
the cashflows involved into account as well, and then search for the matching return.

Getting all the cashflows involved can be a very difficult question, where for instance
taxes, accounting rules and subsidies may play a role.

ROI calculations are very specific for the type of business you are dealing with.
Don't you have a Pricing or Accounting department? There they should have all the tools you need,
and all the knowledge.

Greetings,
Piet
 
Rithanya Laxmi
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Thanks Piet. As you told, yes the cash flow are related to the accounting team. But from the technical prespective and from the development point of view whether we can relate ROI to the benefits the new system is going to bring compared to the exising one? rather than measuring it with some financial metrics (with numeric values)? please clarify.,
 
Rancher
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But that's what ROI is - a financial metric. For the purposes of calculating it you need to be able to translate items like developments costs, man hours, bringing something earlier to market, etc. into their financial equivalent.

What brought this question about - are you trying to justify a particular project? Assuming this isn't the first such calculation being done in the company, the accounting folks should indeed be able to help you out. If this would be the first one, well, maybe you can argue your point on technical merits, and get away without the financials.
 
Piet Souris
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Ulfs reply is spot on.

An example may clarify the matter a little:

suppose the comapny car broke down, and the company cannot do without such a car.
It is up to you to come up with a proposal to the Management Board what to do next.
Well, it is clear that, from a technical point of ciew, something must be done.
Suppose the car is broken down beyond repair. There's no alternative: we need a new one.
If there is only one possible car (brand/type), then the choice is easy: no matter
what the cost, you must buy it, ROI or no ROI!
In fact, since such a scheme is to be expected, the company will have a provision
built up in the recent years, so it shouldn't be a problem.

More difficult would be the case when you can select from a number of brands/types.
Which of those are you going to propose? Here you have to take many things into account:
initial cost, maintenance cost, taxes, comfort, availability, et cetera. Your proposal
becomes more complicated.

But suppose the company car is still functioning? Nevertheless, there is the feeling
it is not up to the task anymore. Maybe it is getting too small when it is used to
deliver products to the customer, or it breaks down rather more often than you like,
the comapny that maintains the car stops its services for cars that old, taxes go
up for this car because of too much pollution, in other words: economically it is time
to look for something new. In this case, the proposal would be even more difficult. You
now have to show the values of whatever new car is coming to whatever values the
current one may have.

So, you try to devise all the cashflows involved, as best as you can. Some of these
are sure: for instance initial costs, taxes (for the time being!), savings on repair costs
for the old one (here we are getting into expected values, they are not sure), feelings
of satisfaction of the people driving in it (and try to value that!), less fuell costs,
well, indeed, and so on.

And this is not a very complicated example. For something like an administration
system, you might also have a change in the number of people needed, new hardware,
ease of use, ...

And there is the timing question: suppose you can invest 1.000 euros (or
pounds, dollars, yens), and there are two assets: one entitles to a payment of 600 in one
years time, and 600 after two years. The other asset entitles to 500 after one year,
and 700 after two years. Which of the two would you choose? The one that
gives you the better Internal Rate of Return. Things get more complicated if
the second asset will give you 800 after two years, but rumours have it that that company
has an uncertain future; it might go bust in the next two years.

Anyway, Wikipedia has lots of texts about ROI and IRR if you want to find out more.
My advice still remains: if you have an Accounting department, get their expertise
working for you. It doesn't matter whether they have done it before or not: the guys
and girls over there must have learned that in their education. They might need you
for technical information (initial costs, licensing fees, whether training of personnel
is necessay, is new hardware needed, and so on).

I realise I have not given you any specific answer, but nevertheless, I hope you have
some ideas how to proceed.

Greetings,
Piet


 
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