Lompare the two differences. 6.31 Harmony Auto Group sells and services imported

Question

Lompare the two differences. 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 inue 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 e In-house First cost,$ Annual cost, $ per year Annual revenue, S per year Life, years 20 -0.2 -4 2.5 1.3 10

Explanation / Answer

Distribute the initial cost over the useful life.

For license, PV = 2, N = 10, r = 10%, FV = 0; compute PMT = 0.33

For in-house, PMT = 20*0.10 = 2

Table depicts that as equivalent annual worth of in-house is higher among the given options, opting in-house is better.

Contract License In-house Life 5 10 Infinity First Cost 0.00 -2.00 -20.00 EUAC of first cost 0.00 -0.33 -2.00 A Annual cost -1.00 -0.20 -4.00 B Annual revenue 2.50 1.30 8.00 C EUAW 1.50 0.77 2.00 A+B+C

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