San Francisco International Airport - In-Depth Analysis of Return on Investment - Example

Name: Course: Lecturer’s Name: Date of submission: Executive summary San Francisco International Airport (SFO) growth in passenger traffic has brought up several challenges. The challenges include security concern, overstretch of resources and increase the cost of operation. The SAFE software proved to address all the pain point of SFO. The Quantum Secure will be contracted due to its reputation in software-based solutions and successful implementation of the system in other airports. The report provides substantive evidence on financial feasibility installing SAFE. The report elaborates the purpose of investment and background of the company. Additionally, it gives the details of assumptions, results, and recommendation. The report provides in-depth analysis of return on investment. Table of Contents Executive summary i Purpose 1 Background 1 Assumptions made when conducting ROI analysis 2 Results of the Analysis 3 Recommendations 5 Reference 7 Purpose The SAFE system addresses all the concerns raised by Kim Dickie and the team during the review of the security challenges facing the company. The system will solve the following problems; Provide background check of people accessing the airport and criminal records. The system that integrates biometric identification feature to eliminate unauthorized individuals accessing sensitive parts of the airport. Introduce the use of new electronic badges. Improve flexibility of employees by providing them with permission to access respective departments. Enable the use of the specific protocol in case of transits (Normal and VIP users) and threat. The system classifies the breach of security and penalty. Automatically produce audit trail for people identity. Background The SFO passenger traffic has increased in the recent past, and now the passengers accessing the airport stands at 100,000 daily. The increase in the number of travelers poses a significant security threat due to understaffed security personnel. Also, increasing the number of staff will cause a rise in the cost of operation. Therefore, the team looks at providing a long-term solution to provide physical identify, credential classification and access management system. The system needs to address growing security threats and comply with safety regulation governing the aviation industry. The system implemented must conform to transportation security administration (TSA) regulations. The company targets to implement the new system at terminal 2 while other terminals will still use the old system. Therefore, the new system must integrate with the new system. The integration will reduce inconvenience and thus cut on the cost of rip-and-replace. The analysis of the cost of bringing in the new system must prove to be cost effective to convince the board to fund the project. Assumptions made when conducting ROI analysis The following assumptions were made during the analysis; The discount rate remains constant during the analysis period. The company saves inconvenience cost by integrating the old and new system to avoid rip-and-replace strategy. The estimated saving is assumed to be high during the initial period of implementation and reduce with time. The cost of labor remains constant at $8 per hour in the analysis period. The likelihood of compliance violation before implementation stands at 80%. The badges lost in 2008 were estimated at 10% and kept increasing with 5% in the consecutive years. The new badges issued in the first year stand at 2000 and 5000 in consecutive years. The reduction in time spent on identity management remains constant at 35% in the period of analysis. Results of the Analysis The technology will cost the company $250,000 and yearly maintenance cost of $25,000. The costs are identifiable and quantifiable. Therefore, reducing deviation and uncertainty on how much and when the company needs to incur cash outflow to finance the project. The undiscounted total Savings from Purchase of the system was more than the cost of purchases. The savings kept increasing while the cost remaining constant and thus increase in net cash flows as shown in the bar graph below; The positive net cash flow is one of the prior indications of a feasible investment before carrying out in-depth financial analysis. The discounting of the net cash flow is the next crucial stage of ensuring that the future cash flows are discounted to reflect the real value of money now. The analysis shows that the discounted cash flow increased up to a certain level that it started to decrease. The decrease is expected since the money loses value with time due to inflation and other economic factor affecting its value. The graph below shows the trend of the cash flow. The use of internal rate of return (IRR) is crucial in project or investment appraisal. The IRR is used as a capital budgeting tool that determines the profitability of potential investment. The desirability of an investment increases with increase in IRR. Also, IRR more than the cost of capital shows a viable since it shows that the business can generate high profits and can settle its debt comfortably. The IRR of the new system stands at 55% compared to the current discounting rate of 10%. According to Chan, the net present value (NPV) shows the difference between discounted cash inflows and outflows. The use of NPV is vital in determining the viability of investment since it determines if it brings in value for the investors. The rationale of the NPV method state that the company or investor should undertake investment with positive NPV and abandon one with negative NPV. The NPV analysis of the new system gives a positive NPV of $350,465. Lastly, the investment appraisal must include the period that the investment pays back what was invested in the business. The analysis showed the payback of undiscounted and discounted net cash flows as 1.47 and 1.65 years respectively. The changes in years are as a result of a decrease in the value of money for the discounted payback and thus taking more time to payback. The discounted payback is accurate since it takes care of time value of money. Recommendations Based on above results analysis, the implementation of the SAFE system is viable, and the company needs to implement it immediately. The investment on security system will not only improve compliance to Transport Security Administration (TSA) body but also provide financial benefit. The implementation will increase company profitability by reducing costs, increasing customer satisfaction and cutting on compliance penalties. The investment produced a high IRR, quick payback period and positive NPV and thus the project is feasible. The variance of the above assumptions will not bring great impact to the results and thus does not affect the qualification of SAFE implementation. It is highly recommended that the team from Quantum Secure Company will carry out enough tests and train the internal personnel to reduce breakdown which will impact the analysis above. For instance, system failure will result to increase in cost associated to inconvenience and thus reduction of cash inflows. The training of internal personnel enhances the usability and reduces service cost in future. Reference Chan, F. T. S., et al. "Investment appraisal techniques for advanced manufacturing technology (AMT): a literature review." Integrated Manufacturing Systems 12.1 (2001): 35-47. 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