Posted: August 4th, 2022

Deliverable 4 – Evaluating Financing Strategies

Deliverable 4 – Evaluating Financing Strategies

Assignment Content

1. 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,

2

>Summary

Comparisons*

Comparisons

Cash Flow Net Present Value

vs Opt 1 vs Opt 2 vs Opt 3

,462)

6,369)

)

4,926)

																																																																																																																																																																			Cash Flow		Net Present Value
	vs Opt	1		vs Opt 2		vs Opt	3
	Option 1 – Develop Internal Software	$ (2,3	4	6	$ (1,		7	9	$ 606	$ 636	$ (372,392)	$ (627,31	8
	Option 2 – Purchase Off the Shelf Software		$ (2,347,067)		$ (1,423,977)	$ (606)	$ 31	$ 372,392	$ (2	5
	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

1 2 3 4 5 6 7 8 9

Option 1 – Develop Internal Software

7

,040

$ (332,640) $ (332,640) $ (332,640)

rate

$ (332,640)

Income tax

excl depreciation

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

$ (500,000) $ (500,000) $ (500,000)

Start-up delay

Depreciation adjustment for tax

$ (500,000)

$ 250,000 $ (250,000) $ 250,000 $ (250,000) $ 250,000 $ (250,000)

Number of consultants 2

Loss of margin on client projects

$ 500,000 Income tax

$ 62,500

$ 62,500

$ 62,500

80 Net cash flow excl depreciation

$ 125,000

$ 62,500

$ 62,500

$ 62,500

$ 62,500

Deprecation life

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

$ 125,000

Start-up delay 1 month

Income tax

Net cash flow

Net present value $ (1,169,051)
Total cash flow $ (2,347,098)

Inflation years
		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		Depreciation adjustment for tax	$ 1,5	80					$ (332,640)	$ (249,480)				Income tax	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	$ (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	$ 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	$ (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
Purchase cost	$ 1,000,000	Purchase & upgrade costs	$ (1,000,000)					$ (500,000)
	1 month		$ 500,000				$ 250,000				$ (250,000)
Consultant costs	$ (49,500)	$ (13,733)	$ (14,288)	$ (14,865)	$ (15,466)
Consultant hours month 1	300	$ (9,900)	$ (2,747)	$ (2,858)	$ (2,973)	$ (3,093)
Bi-annual upgrade cost	$ 139,850			$ 125,000	$ 66,620								$ 62,500	$ 66,786	$ 66,960	$ 67,140
Bi-annual maint hours	$ (919,550)	$ (449,860)	$ (450,359)	$ (450,879)	$ (451,419)
2 years
Start-up payment	Start-up costs	$ (125,000)
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	$ 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%	$ (275,250)	$ (203,940)	$ (210,058)	$ (216,360)	$ (222,851)	$ (229,536)	$ (236,422)	$ (243,515)	$ (250,820)	$ (258,345)

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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.