Should You Upgrade Your PC?

In this chapter, we address the following questions regarding PCs.

• When to sell vs. upgrade?

• How to quantify the buy, upgrade and sell alternatives, i.e., which is a better deal.

When to Sell vs. Upgrade

If you already own a PC you have several options. In general you may fall into one of the following situations.

Leave Well Enough Alone

Your PC is working fine and it is dedicated to a specific job, i.e., accounting or word processing and you are satisfied with the results and cannot see any business benefits from changing your current business practices. This is typically the case when the computer programs are an adjunct to the normal business activity for your company. Leave it alone, the computer is working and you are satisfied with the results, and it will take time, financial and staff resources to change out the computer and associated software. If no business benefit can be identified, don’t change it.

OH NO!, This cost me $3500

If you purchased a computer several years ago, it could have cost you a significant amount of money, e.g., 386 with 2 megabytes of memory and a color monitor, i.e., $3500.00. You have identified a new program to help run your company and you need to decide whether to buy a new computer or upgrade the computer you currently have. The original $3500 has a re-sale value of less than $200.00 (was $500.00 in 1995), if you could sell it. This rapid depreciation of the equipment is because PCs have improved in performance, i.e., speed and disk capacity, 3 to 5 times every six to nine months, and the price in terms of computer capacity has dropped 50% every nine months. A great situation when buying for the first time, an uncomfortable feeling that you did not wait long enough if you have already purchased a computer. Your alternatives are to:

• Upgrade the equipment

• Replace your existing computer with a new computer

• Keep your existing computer and buy a new one

The upgrade costs for this computer are close to $750.00 (processor ($250), memory ($250) and a disk ($250.00)). A new computer cost is approximately $1700.00. The rule of thumb is that if the upgrade is around 50% of the new replacement, buy a new computer. If you can upgrade the computer for less than 50% of the replacement cost, see the previous month’s article on upgrade alternatives, since it pays to invest in the existing equipment.

What about keeping the existing computer? This depends on several factors, the first being office space. If any of the existing programs can be run on the existing computer and not have to share data with the new machine(s), you can save a lot of desk hopping by keeping the old PC for a specific application. In general, you will find that new programs and upgrades to existing programs will work best with the new equipment and the cost and effect on employee morale using SLOWER equipment will result in the older equipment rapidly becoming a paperweight. You may want to consider taking a tax reduction by donating the equipment to a local charity or giving the computer to an employee or a family for home use.

How To Quantify The Buy or Upgrade Alternatives

When investing in your company, it is always best to put a dollar value on the cost and benefits of the alternatives to help guide you in deciding which alternative is financially best for your company. Following is a list of issues and sample calculations to aid you in making a dollar evaluation. We will first look at the pieces of the model and then put it all together to determine if you should buy or upgrade your computer.

Equipment Cost

This is the money out the door to pay for the equipment and should include all costs including taxes and shipping associated with the purchase. We will assume:

• The base computer is $1700.00

• Sales tax of 6% or $102.00

• Shipping charges of $50.00

• UPS power supply $100.00

Total equipment cost is $1952.00

Upgrade Cost

Assuming that your current equipment is a 386, the upgrade cost for this computer is close to $950.00 (processor ($250), memory ($450) and a disk ($250.00)). A new computer cost is approximately $1952.00. A rule of thumb is that if the upgrade is approximately 50% of new replacement, buy a new computer. If you can upgrade the computer for less than 50% of replacement cost, see section on upgrade alternatives -- it pays to invest in the existing equipment.

Staff Time

When you run a business, there is a fixed cost of doing business independent of the volume of business you handle. This fixed cost, i.e., insurance, taxes, interest on loans, depreciation of equipment, is added your direct costs, i.e., labor and material, and divided by the total hours worked to get a loaded hourly rate. This is typically $20 to $30 per hour. Now you know where all the money is going? For the sake of simplicity let’s say that the new computer will take one hour a day less time than the old machine. If we work 52 weeks per year x 5 days/week, then a 1 hour/day time saving at $20.00/hr is a cost saving of $5200.00 per year. So, if the new computer can save you 15 minutes a day, then the staff savings is $1300/year.

Yes, office staff time is expensive and it pays to invest in tools to make it more productive.

Startup Cost

Changing anything has a one time startup cost of time and money. Changing out new for old equipment with minimal business practice changes, e.g. people will be working the same way only with different equipment, costs about 10% of the one time capital cost of the equipment. To test the rule, let’s look at buying a new phone for the office. It costs approximately $100.00 (it’s a speaker phone). 10% is about $10.00. If you spent 30 minutes driving to the phone store, picking out a model, and paying for the phone that would be conservative. We assume a loaded hourly rate of $20.00 per hour . So, a new computer costing $1952.00 results in a one time startup cost of approximately $195.00

Business Practices

When you change the tools you work with, you change how you run your business. Some obvious changes could be:

• Reduction in time doing the job

• New capabilities, i.e., assigning late charges

• 28 day billing cycles

• Faster phone response times, i.e., fewer busy signals for your customers

• Faster billing problem resolution, i.e., less staff time going through manual files

• Less time to complete regular billings

Each of these items can be affected by a new computer system. The trick is to measure each activity in three categories.

1. Hours +/- to do the work

2. Dollars +/- spent on outside services.

3. Change in revenue

Let’s take "Faster phone response times" as an example. Let’s say that once a week, a customer gets a business signal and dials the next number in the yellow pages. Let’s assume that 25% of the time that call would have resulted in a sale which generated $100.00/month for 6 months revenue. So, if we calculate 52 weeks at 1 call/week at .25 times $100.00/month times 6 months in a year, that missed call grows to $7800.00 in revenue per year. If your company’s gross profit is 20% of sales, these missed calls could have generated $1560.00 profit, or in other terms, the computer that you paid $1952.00 pays for itself in the first year by enabling "Faster phone response time".

Putting All Together

Let’s put the pieces together in a table. Down the left hand column will be each item taken into consideration and across the top will be the alternatives

Remember there are other prices you pay regardless of the decision. These prices include the amount of stress in your work, which could be affected by changing equipment or business practices, the feeling of control which you have over your business, and the total hours of your life which you must spend at your business.

It is not easy to change, and although usually the result is for the better, it does take effort and if you feel uncomfortable with the price, sometimes it is best not to change.

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