INSTRUCTIONS FOR USING THE ROI CALCULATOR SPREADSHEET

Attached are Weeks 1, 2, & 3 assignments for reference.

The ROI Calculator spreadsheet is to be included with the individual technology solution description.  This allows each member of the team to specify costs and savings and be able to see how the Return on Investment (ROI) and payback period are calculated.

Prior to the week in which the individual technology solution assignment is due, there is an ungraded Exercise for you to practice with the ROI calculator using simple data and step-by-step directions.

HOW THE CALCULATOR WORKS

First, it would be helpful to understand how the ROI Calculator works.  Open the ROI Calculator spreadsheet and click on the “Instructions” tab.  Read the instructions and then click on the “ROI Calculator Example” tab.  At the top you will see 4 charts; scroll down to the data and come back to the charts later.  In the data area, you will note that savings and costs are identified for the first 5 years of the project, and you will see the following:

  1.  Project Cost Savings/Income.  These are areas where savings are expected to be achieved, and the amounts that are projected to be saved over each of the first 5 years.  Total yearly savings are shown in blue.
  2. Project Expenditures.
    1. Selection Costs.  Note that these are shown in year 0, as they occur prior to starting the project.  The subtotals by item and by year are in orange.
    1. Implementation Costs.  These are one-time costs, but may occur in more than one year.  For example, training may be done at the beginning and then again the next year.  (It may even need to be done at some minimal level every year after the initial training; if that is the case the recurring training costs go below.)  Hardware and software may be purchased incrementally, depending on the implementation schedule.  It is possible that all one-time costs for a small project will occur in year 1.  Part of the implementation cost is an amount that should be set aside for contingencies.  It may only be needed in year 1, and the amount depends on the project.  The subtotals by item and by year are in orange.
    1. Ongoing Costs.  These are costs that will recur year after year.  They may not be the same every year.  For example if a business is growing in employees, additional software licenses may be needed in year 3 for those employees.  However, for purposes of these assignments, the same annual ongoing costs will be used for each year, including year 1.  The subtotals by item and by year are in orange.

Total Project Expenditures are shown in blue.

  • The next two lines on this tab of the spreadsheet show the calculated Cash Flow and the calculated Cumulative Cash.
    • Cash Flow.  Cash Flow by year is automatically calculated by the spreadsheet.  Cash Flow is calculated by subtracting the expenditures for the year from the savings for that year.  For example, in Year 1 (not year 0), the savings are projected to be $65,000 and the total expenditures are $230,000, with a net negative cash flow of $-165,000.
    • Cumulative Cash Flow. Cumulative Cash Flow by year is automatically calculated by the spreadsheet.  It is calculated by taking the previous year’s cash flow amount and adding the current year’s cash flow amount.  The cumulative cash flow for year 1 takes the $-20,000 cash flow from year 0 ($-20,000) and adds the cash flow from year 1 ($-165,000) for a total negative cumulative cash flow for year 1 of $-185,000. Note that in year 2, the Cash Flow is positive (savings exceed costs for that year) and in year 3 the cash flow is very positive and the cumulative cash flow is now positive.  Take a quick look at the chart at the top right side of the sheet and you will see that the “Payback Period” is Year 3 – the year that the accumulated savings exceed the accumulated expenses. 
  • Section 4 provides a place to record any assumptions that have an impact on the cost data.  Examples might be assumptions about how the number of users or transactions might grow over time, how the business might change over the 5 year period, which users would be given access to the system (affecting the number of licenses, etc.).
  • Then, scroll to the top of the page on the “ROI Calculations” tab, and you will see 4 charts. 
    • The lower two charts show the categories of costs and the expenditures in pie charts; this shows at a glance where the largest savings and the highest costs are. 
    • The chat in the top left shows the costs and savings by year. Notice what happens in year 3 – the cumulative cash flow (in purple) is above zero.
    • The chart in the upper right is the most important one.  It shows the calculated Return on Investment (ROI) for the project.  The ROI is calculated by computing the Net Savings (Total Savings over the 5 year period minus the costs incurred during the 5 year period) and dividing the Net Savings by the Total Expenditure.  Then the payback period is calculated to determine in which year the accumulated savings exceed the project costs.

HOW TO USE THE CALCULATOR

After reviewing the ”Instructions” tab and the “ROI Calculator Example” tab, and the information above,  open the tab “Costs and Sources.”   Here you will enter the list of all components that need to be acquired (either by purchase, lease, subscription, etc.), the quantity of each required and a unit cost and a total cost associated with each item.  These general cost estimates may be obtained from any source, but the sources should be cited – for this you should complete the “Source of Cost” column in the spreadsheet inserting the URL where you found the cost.  The categories listed are to help you be sure to include everything; you may add rows as needed in the spreadsheet.  Note that one-time implementation costs are separated from ongoing repeated costs.  Enter your items in the appropriate area.  For example, software costs that are a one-time startup fee would go in the Implementation Costs, while monthly or annual subscription costs for software would go in the Ongoing Costs.  Every item in your description of resources and your graphical representation needs to be included on the cost spreadsheet.

Next, using the “ROI Calculations” tab on the spreadsheet, transfer the one-time costs to that tab, in item 2.2 under year 1.  Copy the recurring annual costs for those items and enter the annual cost in item 2.3; enter the annual cost in the columns for years 1-5.  Then, go to item 2.1 and enter estimates for the costs of selecting and documenting the proposed solution; use reasonable cost estimates for each category; note these are entered in the “year 0” column, since they are incurred prior to the acquisition of the system. 

Finally, go to section 1 on the spreadsheet tab and enter several areas where the organization in the Case Study will realize savings by implementing the system.  You should refer to Section IV of your group’s business case for areas where savings may be realized.  You can add other areas where savings could be expected to come up with a list of four or five areas.  The total savings over the five year period must exceed the total cost of the system, or it will not be approved by the decision-makers.  So, think carefully about all the ways your system will save money for the organization and be sure your total savings if more than the total costs.

If you use the spreadsheet as it is and use “Insert Row” to add rows where you need them and “Delete Row” where needed, the spreadsheet will calculate the total savings and the total costs by year for the first 5 years.  The totals are displayed in blue in bold font. 

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