1. Jennifer Eickert
Lauryn Jashinsky
Logan Moore
Madeline Rynkiewicz
Homework 2
B&K Distributors: Calculating Return on Investment for a Web-Based Customer Portal
After examining the assumptions provided in the case surrounding B&K’s average
transaction cost, base growth projection, and upside growth projection, we have determined that
they are facing a five-year internal rate of return of 40.6% (Exhibit 14A). If the assumptions are
correct, the implementation of a web-based portal for customers to place orders is a logical
investment. B&K’s internal rate of return for five years without the portal would only be 12%,
which is clearly inferior to the projected 40.6% stated earlier. Ultimately, our group would
recommend the implementation of the web based portal. However, one must consider the nature
of these projections before making any decisions and a sensitivity analysis must also be
conducted to determine how different sources of growth have the possibility to effect the
projected return if they vary from the initial projections. If our group were in Anfield and
O’Neil’s position of advising B&K’s upper level management, we would strongly recommend
that they consider answering the following questions of hypothetical scenarios that were not
addressed in the case:
 What if the initial projections of growth (internal and external) are invalid or flawed?
 How will our competitors respond?
 If the portal experiences unforeseen technical issues what are the costs for additional
maintenance and customer service?
 When technology advances, will it leave this portal outdated? If so, how soon?
These questions have no definitive answers, but a further analysis of IRR through different
years reveals that the project carriers significant risk. The three year IRR is only 3.3%, which is
significantly less than the 12% discount rate that B&K would achieve if they did not implement
the web portal (Exhibit 14A). Even though they will experience a positive total incremental cash

2. Jennifer Eickert
Lauryn Jashinsky
Logan Moore
Madeline Rynkiewicz
flow after Year 3, their net present value (NPV) is still negative because the IRR will not surpass
the discount rate until some point in Year 4. Therefore, if the project is set back by technical
difficulties or becomes outdated by further technological advancements, they may never
experience a rate of return higher than 12% and therefore, will never experience a positive NPV.
Of the many variables that are under assumption, one of the most radical is that their market
share will increase from 50% penetration to 70% (Exhibit 14B). As seen by the sensitivity
analysisthat was conducted, if the market share does not increase pass the base of 50%, B&K
will end up with a net present value of $ (337.62) (Figure 1). Therefore, in order to have a
positive NPV, they will need to be above almost 50% of their projected upside market
penetration (approximately 60%). This number is also aligned with the flat 2% growth rate of
franchises in general. If that estimate is understated, B&K will still be able to record a positive
NPV with a lesser degree of penetration. However, the inverse is also true, wherein the event that
their estimate is overstated, they will have to be much closer to their projected upside in order to
avoid a negative NPV.
The projected is undoubtedly carries a large amount of risk, but our group would recommend
that B&K’s senior management team move forward with the decision to implement the web
portal. There is a tremendous amount of upside to outweigh the risk and if things are managed
correctly after implementation, any major trouble should be avoided. They risk losing ground to
competition by not implementing it and may be forced to do it in the future regardless, where
costs have the potential to be higher and the upside significantly lower. The external assumptions
they have made are important, but internal assumptions such as market penetration are critical
because B&K has the opportunity to (at the very least) partially control them. Therefore, the
success of this project will be ongoing and must see commitment from all parties involved.

3. Jennifer Eickert
Lauryn Jashinsky
Logan Moore
Madeline Rynkiewicz
Exhibit 14A: B&K Distributors—ROI Model—Summary Page
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Revenue
Upside 3,400 4,643 5,619 6,487 7,293 7,886
Baseline 3,400 3,608 3,828 4,061 4,308 4,569
Incremental 1,035 1,791 2,426 2,986 3,316
Net income
Upside 411 583 734 878 1,003 1,121
Baseline 411 436 463 491 521 552
Incremental 147 272 387 482 569
Incremental investment program (after tax)
Upfront costs (387)
Ongoing costs (283) (291) (300) (309) (319)
Total (387) (283) (291) (300) (309) (319)
Total (after tax) (240) (175) (181) (186) (192) (197)
Total incremental cash flow (240) (28) 91 201 291 371
(240) (268) (177) 24 314 685
5 years 3 years
Internal rate of return 40.6% 3.31%
Net present value 346 (50)
Discount rate 12%
Tax rate 38%
Support cost inflation rate 3%

4. Jennifer Eickert
Lauryn Jashinsky
Logan Moore
Madeline Rynkiewicz
Exhibit 14B: B&K Distributors—ROI Model—Upside Projection
(Numbers in thousands) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Number of franchise locations 3,400 3,468 3,537 3,608 3,680 3,754
Growth 2.0% 2.0% 2.0% 2.0% 2.0%
Base 50.0% 50.5% 51.0% 51.5% 52.0% 52.5%
Upside 100% 50.0% 60.0% 65.0% 68.0% 70.0% 70.0%
Penetration 50.0% 60.0% 65.0% 68.0% 70.0% 70.0%
Number of customers 1,700 2,081 2,299 2,454 2,576 2,628
Tier structure
Percent 25% 28% 30% 32% 33% 33%
A # of locations 425 583 690 785 850 867
Order frequency 12 12 12 12 12 12
Percent 55% 58% 60% 60% 60% 60%
B # of locations 935 1,207 1,380 1,472 1,546 1,577
Order frequency 8 8 8 8 8 8
Percent 20% 14% 10% 8% 7% 7%
C # of locations 340 291 230 196 180 184
Order frequency 3 3 3 3 3 3
Average order size $250.00 $265.00 $280.90 $297.75 $315.62 $334.56
Growth 6.0% 6.0% 6.0% 6.0% 6.0%
Total transactions
A accounts 5,100 6,991 8,277 9,421 10,202 10,406
B accounts 7,480 9,655 11,037 11,777 12,366 12,613
C accounts 1,020 874 690 589 541 552
Total 13,600 17,520 20,004 21,787 23,108 23,571
Revenue
A accounts 1,275 1,853 2,325 2,805 3,220 3,481
B accounts 1,870 2,559 3,100 3,507 3,903 4,220
C accounts 255 232 194 175 171 185
Total 3,400 4,643 5,619 6,487 7,293 7,886
Unit margin
COGS % 68.70% 68.70% 68.70% 68.70% 68.70% 68.70%
Gross margin per order 78.25 82.95 87.92 93.20 98.79 104.72
Processing cost per order $29.50 $29.25 $28.71 $28.19 $28.77 $27.99
Net contribution per order 49 54 59 65 70 77
Account contribution
Transactions 13,600 17,520 20,004 21,787 23,108 23,571
Net margin per order 49 54 59 65 70 77
Operating income 663 941 1,184 1,416 1,618 1,808
Tax
Tax rate 38% 38% 38% 38% 38% 38%
Tax 252 357 450 538 615 687
Net contribution after tax 411 583 734 878 1,003 1,121

5. Jennifer Eickert
Lauryn Jashinsky
Logan Moore
Madeline Rynkiewicz
Exhibit 14C: B&K Distributors—ROI Model—Base Case Projection
(Numbers in thousands) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Number of franchise locations 3,400 3,468 3,537 3,608 3,680 3,754
Growth 2.0% 2.0% 2.0% 2.0% 2.0%
Penetration 50.0% 50.5% 51.0% 51.5% 52.0% 52.5%
Number of customers 1,700 1,751 1,804 1,858 1,914 1,971
Tier structure
Percent 25% 25% 25% 25% 25% 25%
A # of locations 425 438 451 465 478 493
Order frequency 12 12 12 12 12 12
Percent 55% 55% 55% 55% 55% 55%
B # of locations 935 963 992 1,022 1,053 1,084
Order frequency 8 8 8 8 8 8
Percent 20% 20% 20% 20% 20% 20%
C # of locations 340 350 361 372 383 394
Order frequency 3 3 3 3 3 3
Average order size $250.00 $257.50 $265.23 $273.18 $281.38 $289.82
Growth 3.0% 3.0% 3.0% 3.0% 3.0%
Total transactions
A accounts 5,100 5,254 5,412 5,575 5,741 5,912
B accounts 7,480 7,706 7,938 8,176 8,420 8,671
C accounts 1,020 1,051 1,082 1,115 1,148 1,182
Total 13,600 14,011 14,432 14,865 15,310 15,766
Revenue
A accounts 1,275 1,353 1,435 1,523 1,615 1,714
B accounts 1,870 1,984 2,105 2,234 2,369 2,513
C accounts 255 271 287 305 323 343
Total 3,400 3,608 3,828 4,061 4,308 4,569
Unit margin
COGS % 68.70% 68.70% 68.70% 68.70% 68.70% 68.70%
Gross margin per order 78.25 80.60 83.02 85.51 88.07 90.71
Processing cost per order $29.50 $30.39 $31.30 $32.24 $33.20 $34.20
Net contribution per order 49 50 52 53 55 57
Account contribution
Transactions 13,600 14,011 14,432 14,865 15,310 15,766
Net margin per order 49 50 52 53 55 57
Operating income 663 704 746 792 840 891
Tax
Tax rate 38% 38% 38% 38% 38% 38%
Tax 252 267 284 301 319 339
Net contribution after tax 411 436 463 491 521 552

6. Jennifer Eickert
Lauryn Jashinsky
Logan Moore
Madeline Rynkiewicz
Exhibit 14D: B&K Distributors—ROI Model— Average Transaction Cost Matrix
Figure 1
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Percentage of orders by channel:
Phone 60% 60% 57% 55% 52% 48%
Fax/mail 40% 35% 33% 30% 33% 32%
Web 0% 5% 10% 15% 15% 20%
Total 100% 100% 100% 100% 100% 100%
Cost per order:
Phone 32.50$ 33.48$ 34.48$ 35.51$ 36.58$ 37.68$
Fax/mail 25.00$ 25.75$ 26.52$ 27.32$ 28.14$ 28.98$
Web 3.00$ 3.03$ 3.06$ 3.09$ 3.12$ 3.15$
Weighted average cost 29.50$ 29.25$ 28.71$ 28.19$ 28.77$ 27.99$
WAC without Web 29.50$ 30.39$ 31.30$ 32.24$ 33.20$ 34.20$
Difference $ 1.14$ 2.58$ 4.04$ 4.43$ 6.21$
Inflation increases:
Phone 3.00%
Fax/mail 3.00%
Web 1.00%
Percent
of Upside
345.57$
Market
Penetration
100.0% 345.57$ 70%
90.0% 277.25$ 68%
80.0% 208.93$ 66%
70.0% 140.61$ 64%
60.0% 72.30$ 62%
50.0% 3.98$ 60%
40.0% (64.34)$ 58%
30.0% (132.66)$ 56%
20.0% (200.98)$ 54%
10.0% (269.30)$ 52%
0.0% (337.62)$ 50%
Net Present Value