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 Purchasing 549500
Disposal value subtracted from the 1st year’s cost of purchasing 50000
Variable Dimension Sensor Price to be added to 1st year’s cost 80000
Year Cost NPV at 20%
1 579500 579500
2 549500 457917
3 549500 381597
4 549500 317998
5 549500 264998
6 549500 220832
7 549500 184026
8 549500 153355
Total Cost of Purchasing 2560223
Machine Cost 450000
Total Annual cost of Assembling
1 2 3 4 5 6 7 8
Raw Material Costs 400000 400000 400000 400000 400000 400000 400000 400000
Assembly Costs 500000 500000 500000 500000 500000 500000 500000 500000
Cost of manager 80000 80000 80000 80000 80000 80000 80000 80000
Total Costs before dep. 980000 980000 980000 980000 980000 980000 980000 980000
Depreciation 90000 90000 90000 90000 90000
total Costs after Dep. 1070000 1070000 1070000 1070000 1070000 980000 980000 980000
Corporation tax savings @ 35% 374500 374500 374500 374500 374500 343000 343000 343000
Total Costs After Tax 605500 605500 605500 605500 605500 637000 637000 637000
NPV at 20% 605500 504583 420486 350405 292004 255996 213330 177775
Total NPV 2820080
Savings 259857
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.