Two Approaches Are Being Considered for a New System to Track

Essay

Two approaches are being considered for a new system to track and manage a company's project portfolio: one is for the company's own IT department to develop and install the system, the other is to hire an IT contractor to install one of its existing products. The IT department estimates it can complete the project in 2 years with existing personnel. The department operates as a profit center and, hence, charges for its work. The estimated development and upkeep cost of the system is $ 8 M. The contractor has proposed to install its system in only 6 months for a cost of $10 M, and to maintain it thereafter for an additional cost $20,000 per year, starting after the system has been operational for 6 months. The annual benefit of either system in terms of better-selected and -managed projects is estimated to be at least $20 M. In terms of benefit-cost ratio, which is better? Note: it is expected that the chosen system, whichever, will have to be replaced by something else in 6 years.