Reference no: EM132471007

Introduction

• Becky Mounts was hired by the Oak Ridge Nurseries (ORN), a commercial nursery and landscape supply company in Greensboro, NC, as an Analyst in their newly-formed Project Office (PO). She reported to work and was assigned a small cubicle with an old laptop computer. Not what she had hoped for in her first job, but she was grateful to land her first job in a rapidly growing economy and resolved to give it her best effort. The PO reported to the Finance group, and she liked the VP-Finance who had hired her.

• ORN has grown steadily into a dominant regional supplier of plants, trees, shrubs and related supplies to area retailers, including big-box chains, home improvement chains, and retail nurseries. ORN's profits had not kept pace with growth, however, prompting President Maggie Scott to look for cost management and profit expansion opportunities. ORN's history of doing projects was mixed at best. Most projects finished over budget, and were late to deliver benefits (if they delivered at all). Behind the decision to hire Becky Mounts was the intent to use her and the Project Office to manage projects to ensure they delivered the expected results.

The Challenge

In late 2019, Maggie Scott conducted a brainstorming session with the Operations, Sales and Finance VPs. Maggie made it clear that ORN needed a strategy to increase margins through increased sales and/or decreased operating expenses while recognizing the importance of staying current on technological advances. The group developed a list of potential ideas and then narrowed it to a short list of four projects:

A. Accounting and HR Software - Migrate from ORN's old business software to a modern software suite, hosted by a third party. This would allow ORN to cut internal IT staff and reduce data center costs. The VP-Finance believed this would reduce SG&A costs directly, plus enable further staffing reductions in the operating departments.

B. Business Intelligence Software - Install state-of-the-art BI software. The Finance chief argued that this option would enable better analysis of profitable products, sales channels and retail customers. Armed with this knowledge, ORN could eliminate unprofitable products and customers, allowing them to focus their resources on growing profitable sales to their best customers.

C. Retail Display Upgrade - Replace old plastic retail displays with new, stainless steel racking systems designed for easy load/unload direct to the retail sales floor. The Operations and Sales VPs argued that this option would increase retail sales, strengthen retail customer relationships and improve operating efficiencies.

D. Transportation Fleet Upgrade -Replace the oldest of ORN's aging fleet of delivery trucks and tractors. The Operations VP suggested that this project will reduce fuel and maintenance costs and increase supply chain performance.

As the meeting closed, Maggie asked the VP-Finance to analyze these four options for their financial contribution potential and recommend the best course of action. The VP promised to deliver his recommendations in a week.

The Analysis

• The VP-Finance called Becky Mounts and asked for a meeting between the two of them. She explained the need to analyze the four options and the deadline he had committed to. He asked Becky about her background with regard to project selection techniques. Becky replied that she had been trained in various project selection methods, including Net Present Value (NPV), Payback Period (PBP), Internal rate of return (IRR), and Real Analytical Hierarchy Process (AHP). The VP-Finance asked her to start with the NPV, IRR, and PBP analysis and instructed Becky to interview internal experts in Operations and Sales, plus the IT Manager. Becky was asked to schedule a meeting with the VP to review her analysis mid-week.

• Becky was concerned about the short time-frame to deliver her analysis, but she was eager to do well on her first assignment, so she agreed. That night, she pulled her university project management textbook and reviewed the principles of NPV, PBP, and IRR analyses as a refresher. She realized that the hard part of the assignment would be getting the data for each project. The next day, Becky scheduled interviews with the ORN experts most knowledgeable of each of the projects. She also secured the VP-Finance's direction to use a hurdle rate (expected return) of 8.1% and add a 1.95% inflation rate assumptions in the discounting analysis.

Project Details

During the interviews, Becky asked many questions and took careful notes, which she organized afterwards to extract the important information. Here is a summary of her notes:

A - Accounting & HR Software

The IT Manager had researched the two software options, and had obtained informal estimates from her preferred suppliers of each. For this software, she considered the merits of server-based software that ORN could operate on their premises, versus hosted and cloud-delivered models.

Her preference was a popular cloud-based software suite which a competitor had implemented, with good results (she had heard). The vendor offered BN a discounted one-time license cost, combined with implementation and consulting services, for a one-time cost of $460,000. After the initial implementation, the supplier would charge $19,000 per year for maintenance and support. The maintenance and support quote was fixed for 5 years post implementation; starting year 6, she estimated the maintenance cost would grow approximately by 9.5% per year. The IT Manager recommended a ten-year useful life for all software investments.

In addition to the benefits of the newer software, the IT Manager told Becky that ORN could eliminate two data entry clerks, and related expenses which cost the firm $135,000 per year ("all-in" or fully burdened; including all compensation and benefit costs).

B - Business Intelligence Software

For the BI software, the IT Manager selected the companion product to the Accounting & HR Software she recommended. All the integration to the accounting databases, as well as a full set of standard reports, was provided "out of the box". She had negotiated a one-time license cost for this product at $225,000. The funds would have to be committed in the same year as for Project A but the implementation would start one year after the Accounting & HR software had been deployed. The IT Manager predicted that improved decision-making enabled by the software would increase profits by $68,000 the year following implementation, increasing by $6,500 per year thereafter. Support and maintenance costs would amount to $23,500 per year, starting the year following implementation. The IT Manager negotiated to fix (cap) the maintenance and support costs over the ten-year expected life of the software.

C - Retail Display Upgrade

The VP-Operations/Supply Chain who championed this project had already discussed the design and fabrication of reinforced stainless steel racks with a local machine shop. The racks were custom-designed for easy load / transport / unloading of various sized plants and their containers. Open rack tops would allow sunlight to display the plants at the retail facility and keep them healthy. Mounted on over-sized industrial wheels, the racks would tolerate regular water exposure without rusting.

The machine shop hoped to fill excess production capacity and promised quick delivery. They estimated that at the current cost of stainless steel, they could supply 3000 racks for a volume price of $250 per rack. The VP Operations had collaborated with the VP Sales on this project. Together they estimated that the new racks would be quickly embraced by the major retail accounts, and could boost sales margins by $118,000 per year, starting upon delivery. Further, the Salesman reminded Becky that this benefit could be expected to grow with inflation. The rack supplier offered to provide maintenance and repair service for an additional $15,000 per year (fixed) starting one year after the racks have been delivered; the maintenance fee will increase yearly by 3%. The VP-Operations believed that the high-quality racks, combined with effective maintenance services, should extend their useful lives to a full 12 years. All the racks will be delivered at the same time which will occur 1 year after the project is approved.

D - Transportation Fleet Upgrade

Retail customers expected BN to keep their stores fully-stocked during critical selling seasons. To do that, ORN's supply chain depended on its fleet of delivery trucks and tractors. During the recession, the company had delayed normal truck replacement to conserve cash flow. But recently the economy has is doing pretty well, and the VP-Operations recognized the fleet's age was driving higher maintenance costs that ate into margins and sometimes impacted deliveries. The increasing fleet average age was driving growing maintenance costs, increased fuel costs, and a deteriorating retail image. ORN was also under pressure by one large customer to improve its environmental record, and the company was concerned they could lose this key customer if they continued to ignore the pressure. Further, the EPA had mandated new pollution control standards for the 2021 model year, which dramatically reduced tailpipe emissions. ON's older trucks and tractors did not use any of this clean technology.

The fleet consisted of a mix of over the road tractors pulling large-capacity, 40-foot trailers that were optimal for large deliveries to retail distribution centers, and smaller, all purpose-built trucks designed to deliver live product from nursery to retail outlets.

The VP-Operations proposed replacement of a significant part of the fleet, including some large-scale tractor-trailers and some mid-size delivery vehicles. After reviewing the offerings of several major suppliers, he had chosen a Swedish supplier with proven emissions technology whose trucks and road tractors were all "Made in the USA". The supplier had quoted a package consisting of seven new over-the-road tractors @ $95,000 each, and six mid-size delivery trucks which sold for $75,000 each, plus a $15,000 custom body-building fee per truck. The truck bodies would be sized to handle the new retail display racks described in Proposal C) above. As a sweetener, the supplier agreed to handle all routine maintenance for these new trucks and tractors for a flat fee of $50,000 per year. The VP-Ops estimated that the new fleet purchases could reduce fuel consumption, increase mileage per gallon and reduce maintenance costs by $438,000 per year over the estimated 6-year useful life of the equipment. The company is not anticipating much salvage value for the trucks and tractors beyond this period.

Assignment - Preparation for the Meeting

Becky decided to evaluate each of the four projects using discounted cash flow analysis and payback period analysis. In your role acting as Becky, Add a business report (plus appendices), professional in appearance, that contains these analyses and answers the following questions. Include appendices containing Excel or similar spreadsheets, showing the calculations used in your analysis.

Question 1. Perform a Discounted Cash Flow (NPV) analysis for each of the four projects.

Question 2. Perform a Payback Period analysis for each proposed project.

Question 3. Determine the internal rate of return for each project

Question 4. Using the NPV, rank the projects from best to worst

Question 5. Using the IRR, rank the projects from best to worst.

Question 6. Using payback period analysis, rank the projects from best to worst.

Question 7. What dependencies exist between projects? How would that impact your recommendations to ORN?

Question 8. Assume that ORN has $1,000,000.00 capital funding is available to invest in projects for the year 2020. Based on the discounted cash flow analysis, which projects should be recommend for the senior management to approve?

Question 9. Now, assume a $2,000,000.00 capital funding is available. Based on discounted cash flow analysis, which projects should Becky recommend for the senior management to approve?

Question 10. What additional factors, beyond the quantitative analysis should Ashley take into consideration in making her recommendations?