Question 1: What is the appropriate discount rate for a government agency Such as the San Diego City Schools?

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According to the text, the initial costs for this project is $15 868 000 and in order to generate the Return on Investment, Jeff Wiemann decided to consider the useful life of the project to be 5 years (n=5).

1. What is the appropriate discount rate for a government agency such as the San Diego City Schools? WACC calculation (estimation) WACC = cost of debt + cost of equity (weighted by the % of debt/equity in the capital stack) Though we do not know the precise numbers specific to SDCS at that time, we can make some generalizations. Cost of debt = interest rate of a school bond Typically these types of bonds are voted for (approved) and paid back by the local community (known as voted indebtedness); payments are collected with property taxes Typically these bonds bear very low nominal interest rates (usually just a CPI adjustment) since the voters are the ones who bear the interest (does not make sense for them to issue themselves a high-interest rate loan) If the bonds are sold in

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the open market, they are considered low-risk, thus bondholders do not require a high interest rate Approx. Approx. Cost risk-free school of rate bond equity at time rate = at of the time expected case of (2002) the return (US 10-year (2002) of T-Bill (link equity ) ) = = 5% 5%

case

investments

Equity in this case is provided via tax revenue (probably a mixture of local, state and federal sources) The The Cost median income of tax of San rate Diego for City at this the 2000 income equity Census was measured is is at about at $46,000 9.3% 9.3%

estimated

bracket

estimated

Weighted average: debt to equity ration approximately 60:40 (based on the balance sheet on page 21 of this report ) Weighted average = 8.7%

The appropriate discount rate should be determined from the federal risk free interest rate plus a small risk premium. The federal risk free interest rate in 2002 averaged 5.4%. Using this as the base, a

government agency other than the federal government would need to add a small risk premium to compensate investors for the additionalrisk associated with being a school district instead of the federal government. San Diego would also need to add additional compensation to account for tax factors. With these factors in mind, San Diego should use a discount factor of approximately 7.8% (5.4% risk free rate + .5% risk premium + 1.9% tax compensation). Question 2: Calculate the ROI for San Diego s ERP system. How can you quantify the soft benefits of the system and include them in the analysis? The soft benefits can be quantified through creative assumptions. These assumptions can come from experiences others had when implementing similar solutions or from drawing on similarities between other quantifiable benefits. Other principals compared their successful implementation like receiving an additional recruiting team, valued at $320K/year, this can be used as the estimate for Weiman s improved recruiting due to the HR solution. Likewise, SDCS spent $400k/year on an internal audit team to provide access to HR data, this team could be disbanded with the implementation of an HR solution leading to a $400k/year benefit. Improved employee morale and productivity could be measured by a lower turnover rate, leading to lower training costs and recruitment costs, as well as higher output rates leading to lower clerical demands and improved service. {draw:frame} Question 3: With the information you have access to, what should Weimann present and recommend at the board meeting? Specifically, would you recommend going forward with the HR system...
This case focuses on the challenge of quantifying the return on investment (ROI) of a large technology project, Enterprise Resource Planning (ERP), in the nonprofit environment of the San Diego City Schools. The school district does not generate a profit so traditional revenue enhancement arguments do not work. Instead, the case discusses the internal processes re-design and system consolidation enabled by the new ERP system. The system ROI is composed of two major components: cost savings from removal of legacy applications and productivity improvements. The cost containment benefits are relatively straight forward to quantify, but do not justify the system. The productivity improvements are harder to quantify, and many can be categorized as soft benefits. Furthermore, many of the productivity and cost-saving benefits will not be realized without personnel reductions, which are especially difficult in school districts and government agencies. The case debrief therefore discusses the tradeoffs quantifying soft benefits and productivity improvements, best practices for management decision making, and the organizational change necessary to realize the ROI.