United Technologles Inc Solution

/United Technologles Inc Solution
United Technologles Inc Solution 2019-08-19T07:37:19+00:00

1: What is the NPV of purchasing vs. assembling ? (provide details of the calculation).

Annual cash out flows of Purchasing (Year 1 to Year 5)= $100,000 *8.3* (1 – 35%) =539500
Additional cost of manager salary= 10000 per year
total Annual cost of Purchasing549500
Disposal value subtracted from the 1st year’s cost of purchasing50000
Variable Dimension Sensor Price to be added to 1st year’s cost80000
YearCostNPV at 20%
1579500579500
2549500457917
3549500381597
4549500317998
5549500264998
6549500220832
7549500184026
8549500153355
Total Cost of Purchasing2560223
Machine Cost450000
Total Annual cost of Assembling
12345678
Raw Material Costs400000400000400000400000400000400000400000400000
Assembly Costs500000500000500000500000500000500000500000500000
Cost of manager8000080000800008000080000800008000080000
Total Costs before dep.980000980000980000980000980000980000980000980000
Depreciation9000090000900009000090000
total Costs after Dep.10700001070000107000010700001070000980000980000980000
Corporation tax savings @ 35%374500374500374500374500374500343000343000343000
Total Costs After Tax605500605500605500605500605500637000637000637000
NPV at 20%605500504583420486350405292004255996213330177775
Total NPV2820080
Savings259857
It is assumed that all costs incurred at the beginning of the year
 

2: What are other issues you should take into account when making the decision?

There are other important issues to be considered before making the decision to shutting down the assembling department. The company should consider the quality of the component buying vs. making it in house. Making a component in house may give customer more satisfaction than they get when they know company used other’s components in their products as well. The company should also know the cost of shortage if the current supplier fails to deliver component on time. The company should also consider whether there is some competitive advantage of using an own produced component and whether they can offer one in the market with increased production and thus bringing a more revenue stream to the company’s product portfolio.

The company should also have contigent plans in place in case the vendor failes to provide component in the required period for some reason and should always have one supplier in the pipeline to be contacted for the component if current supplier refuse to do so. This is because if there is no alternative arrangement, Frontech corporation’s refusal to provide the component or in case of shortage due to any other reason, the primary product would suffer drastically. The company should take all these things in mind before continuing with the project.