Investment Analysis Tool

Instructions
Introduction
This tool facilitates the analysis of a proposed IT investment by capturing assumptions on spending and benefits, and then computing Return On Investment (ROI)
and other metrics designed to help clarify whether the deal is a desirable one.
Prerequisites
None. No macros or special functions are used.
Steps and FYIs
1) Each deal requires a new copy of this workbook. Only blue cells should have information entered into them. Yellow cells are calculated.
2) Depending on the nature of the proposed investment, different assumptions may apply, both for the spending and the anticipated benefits.
3) The Assumptions block at the top right is meant to capture most of the key parameters so that these may easily be changed.
4) The assumptions that are highly specific to the particular example are contained in the lower half of the Assumptions block, and probably won't apply to all analyse
5) Other implicit assumptions are contained in the formulas themselves, such as costs/salaries rising each year by a given factor.
6) The most important assumptions, however, are contained in the rows under estimates for costs, and estimates for benefits. You should attempt
to capture every possible cost that is likely to ensue from the proposed investment
7) All costs/expenses must be entered as negative numbers
Maintenance
Each deal requires some modification of the sheet, most likely
Otherwise, no regular maintenance should be needed. All dates, for example, are triggered off the Implementation date in the Assumptions block.
Weaknesses/Still To Do

Background and Technical Approach

Note that the benefit calculations implicitly consider productivity savings as a kind of cash inflow. That is, of course, only strictly true if staff can be reduced.
Sources
Much of this was originally taken from ideas garnered from a free "Financial Metrics Lite" spreadsheet tool distributed at
Solutions Matrix.
However, significant modifications were made, to both format and formulas, so that the sheet would be a one-page presentation of ROI metrics,
and to separate out capital costs from expense costs
Other formula information was taken from http://www.cioview.com/whitePapers/CIOview_TCO_NPV_EVA_IRR_ROI.pdf

Creative Commons License

© Copyright 2005-2013 Peter Kretzman.
No support for this model is implied.

This spreadsheet is licensed under a Creative Commons Attribution 3.0 license.

See http://creativecommons.org/licenses/by/3.0/
This kind of license is also referred to as copyleft.

Confidential 08/12/2019 Page 1

 IT Investment Analysis--New Purchase

Proposed investment: New Storage Solution Assumptions:

Vendor: XYZ Vendor Hourly labor cost, fully burdened $75
Productivity boost from project 5%
Prepared by: <Author> Employees boosted in productivity 2
Date: March 1, 2008 Expected implementation date 6/1/2008
Internal labor impl. hours needed 140
Annual salary boost 4%
Payback period: 1.4 years from implementation Interest rate for discounting 10%

Benefits of proposed investment (all dollars in thousands)

2008 2009 2010 2011 2012 Total
Increased IT staff productivity 9 16 17 17 18 77
Maintenance on former SAN (not incurred) 90 90 90 100 100 470
Data Center space savings 2 2 2 2 2 10
Power consumption savings 2 2 2 2 2 10
Total incremental benefits 103 110 111 121 122 567

Costs of proposed investment (all costs should be entered as negative)

Capitalizable: 2008 2009 2010 2011 2012 Total
XYZ hardware (45) (45) (45) (50) (50) (235)
Internal labor for implementation (21) (21)
Professional Services (13) (13)
Expense:
Power installation at colo facility (2) (2)
XYZ hardware maintenance costs (20) (22) (23) (66)
Shipping and Tax (16) (16)
XYZ software license purchase (36) (36)
Total expenditure (153) (45) (45) (72) (73) (389)

Net benefit of proposed investment

Total incremental benefits 103 110 111 121 122 567
Total expenditure (153) (45) (45) (72) (73) (389)
Net benefit (50) 65 66 49 49 178

Cumulative Incremental Cash Flow (50) 15 81 130 178

NPV (5 yr)
Discounted Cash Flow Stream (46) 54 49 33 30 121

Payback Period: 1.4 years from implementation

3 years 4 years 5 years

Simple ROI 33% 41% 46%
Discounted ROI 30% 37% 42%
NPV $58 $91 $121
Internal Rate of Return (IRR) 119%
Modified Internal Rate of Return (MIRR) 52%

Recap of Proposed Costs 2008 2009 2010 2011 2012 Total

Expense dollars (74) 0 0 (22) (23) (120)
CapEx dollars (79) (45) (45) (50) (50) (269)
Total expenditure (153) (45) (45) (72) (73) (389)

Proposed investment: New Storage Solution

Dollars ($ 000s)

80
Break-even 65 66
60 point
49 49

40

20

0
2008 2009 2010 2011 2012

(20)

(40)

(50)
(60)
Net Incremental Benefits Cumulative Incremental Cash Flow

Printed 08/12/2019 Page 2 IT investment--new purchase