Kellogs

1323 words 6 pages
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
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Would you advise the school board of these risks?
Specific Risks to SDCS
Negotiations
RISK - Wiemann learned that universities and colleges were poor negotiators with ERP contracts (and the like).
ADVISE - Raise awareness with the board; suggest hiring an experienced negotiator from the private sector. Balance compensation structure between getting high-quality, appropriate system (long-term payout of the entire ERP solution) with an incentive to save the district money upfront (fee based on savings--"if I save you $50 can I have $10 of it?").
IT Experience
RISK - IT departments in schools are not as proficient as IT departments in the private sector; the school will face problems/challenges/needs it is not apt to handle.
ADVISE - Tell the board, so that more funds can be added to bring the IT department up to the necessary levels. This issue will arise sooner or later, and it is better to expose it now rather than later when the ERP system is up.
Software Modifications
RISK - Wiemann learned that universities with ERP required $2 to $4 million in added upgrades after the implementation due to lack of understanding in the initial stages (and in negotiations).
ADVISE - Merge this risk in with the first one mentioned (about negotiations) and prepare to ask for more time in the negotiation stage in order to avoid added costs down the road. It is better to under-promise and over-deliver.
Work Slowdown
RISK - HR will experience

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