Profit and Supply Chain Improvement Project

Page 1of 6Assignment 2: Cost-Benefit AnalysisParts A and B Due Sunday, Midnight of Week 10(25% of Final Grade)OverviewIn this assignment, you will take on the role ofa senior member of the finance team assigned to lead the investment committee of a medium-sized telecommunications equipment manufacturer.Your team is evaluating a “make-versus-buy” decision that has the potentialtoimprove the company’s competitiveness,but which requires a significant capital investmentin new equipment. The assignment is organized into two parts:Part A: Data calculations based on the information in the scenarios Part B: Recommendations based on the calculationsOpportunity DetailsThe new equipment would allow your company to manufacture a critical component in-house instead of buying it from a supplier.Thiscapability would helpyou stabilize your supply chain (which has suffered from some irregularitiesand quality issuesin the past).It couldalsohave a positive impact on profitability through the absorption of fixed costssince this new machine will have plenty of excess capacity. There may even be a possibility that the company could leverage this capability to createa new external revenue stream by providing services to other companies.The company has been growing steadily over the past 5 years, and the financials and future prospects look good. Your CEOhas asked you to run the numbers. After doing some digging into the business, you have gathered information on the following:Theestimated purchase price for the equipment required to move the operation in-house would be $500,000.Additional net working capital to support production (in the form of cash used in Inventory, AR net of AP) would be needed in the amount of$25,000per yearstarting in year 0 and through all 5 years of the projectto support production.The current spending on this component (i.e.annual spend pool) is $875,000. The estimated cash flow savings of bringing the process in-house is 20% or annual savings of $175,000.This includesthe additional labor and overhead costs required.Your companyhas access to a credit line and could borrow the funds at a rate of 6%. Finally, the equipment required is anticipated to have a somewhat short useful life,as a new wave of technology is on the horizon. Therefore,it is anticipated that the equipment will be sold after five years for $25,000.(i.e.the terminal value).