2. Your company plans to outsource the printing and copying function. You have b

Question

2. Your company plans to outsource the printing and copying function.  You have been asked to evaluate this proposal.  You have gathered the following information.

Your company plans to outsource the printing and copying function. You have been asked to evaluate this proposal. You have gathered the following information. Current printing and copying costs within the company: 335,000 per year for next 8 years Your company's required return: 12% An outsourcing contract has been negotiated with the following payment terms: 10,000 for the first year, 50,000 for the second year, 145,000 for the third year, and 420,000 per year for the following 5 years. What is the present value of each option? Which option would you choose? Why?

Explanation / Answer

Year

Cash Flow ($)(a)

Present ValuePVF @ 12%(b)

PV(axb)

1

335000

0.893

299155

2

335000

0.797

266995

3

335000

0.712

238520

4

335000

0.636

213060

5

335000

0.567

189945

6

335000

0.507

169845

7

335000

0.452

151420

8

335000

0.404

135340

1664280

Year

Cash Flow ($)(a)

Present ValuePVF @ 12%(b)

PV(axb)

1

335000

0.893

299155

2

335000

0.797

266995

3

335000

0.712

238520

4

335000

0.636

213060

5

335000

0.567

189945

6

335000

0.507

169845

7

335000

0.452

151420

8

335000

0.404

135340

1664280

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