6.31 Harmony Auto Group sells and services imported and domestic cars. The owner
ID: 1112354 • Letter: 6
Question
6.31 Harmony Auto Group sells and services imported and domestic cars. The owner wants to evaluate the option of outsourcing all of its new auto warranty ser- vice work to Winslow, Inc., a private repair service that works on any make and year car. Either a 5-year contract basis or 10-year license agreement is avail- able from Winslow. Revenue from the manufacturer will be shared with no added cost incurred by the car/ warranty owner. Alternatively, Harmony can con- tinue to do warranty work in-house for the foresee- able future. Use the estimates made by the Harmony owner to perform an annual worth evaluation at 10% per year to select the best option. Monetary values are in $ million units. Contract License In-house First cost, $ Annual cost, $ per year Annual revenue, S per year Life, years 20 0.2 4 2.5 10Explanation / Answer
Since Alternative 3 -In-house has the highest annual worth of 20,
alternative 3 is prefered.
Cost/Income Contract License In-house Initial cost 0 -2 -20 Annual cost $ per year -1 -0.2 -4 Annual revenue $ per year 2.5 1.3 8 Years 5 10 infinity Minimum attractive rate of return (MARR)= 10% Alternative 3- In house Evaluation of annual worth -20 - 4 (P/A, 10%, Infinite time) + 8 (P/A, 10%, infinitty) Alternative 1 - Contracting out 0- 1(P/A, 10%, 5 years) + 2.5 (P/A, 10%, 5 years) -20 - 4 (10) + 8 (10) For coumpounded values check factor tables = 20 0-1(3.791) + 2.5 (3.791) 5.6865 Alternative 2- License -2 -0.2(P/A, 10%, 10 years) + 1.3 (P/A, 10%, 10 years) -2 - 0.2 (6.145) + 1.3* (6.145) 4.7595 Contract License In-House Annual worth 5.686 4.759 20 ConclusionSince Alternative 3 -In-house has the highest annual worth of 20,
alternative 3 is prefered.
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