Hemisphere Electric Coop (HEC) is planning to outsource its 51-person informatio

Question

Hemisphere Electric Coop (HEC) is planning to outsource its 51-person information technology (IT) department to Dyonyx. HEC believes this move will allow it to have access to cutting edge technologies and skill sets that would be cost prohibitive to build on its own. If it is assumed that the loaded cost of an IT employee is $100,000 per year, and that HEC will save 25% of this cost through outsourcing, what is the present worth of the savings to HEC for a 5-year contract at an interest rate of 0.5% per month? Assume the same number of contract employees is needed as are currently employed

Explanation / Answer

Monthly interest rate = 0.5%

Number of months = 12 x 5 = 60

Annual cost saving = $100,000 x 25% = $25,000

Monthly cost savings = $25,000 / 12 = $2,083.33

Present worth of savings ($) = 2,083.33 x P/A(0.5%, 60) = 2,083.33 x 51.7256** = 107,761.49

**P/A(r%, N) = [1 - (1 + r)-N] / r

P/A(0.5%, 60) = [1 - (1.005)-60] / 0.005 = (1 - 0.7414) / 0.005 = 0.2586 / 0.005 = 51.7256

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