6.31 Harmony Auto Group sells and services imported and domestic cars. The owner

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 Ye in $ million units. Contract License In-house First cost, $ Annual cost, $ per year Annual revenue, S per year Life, years 20 4. 0.2 1.3 10 2.5

Explanation / Answer

Since EAB of contract is higher, the contract option is preferred

Calculation of Net revenue : Contract License In- House Annual Cost -1 -0.2 -4 Annual Revenue 2.5 1.3 8 Net Revenue 1.5 1.1 4 Calculation of Contract License In-House First Cost 0 -2 -20 Net Revenue 1.5 1.1 4 Life 5 10 Infinity PVAF (10%) 3.7907868 6.1445671 PV of Cash Inflows 5.6861802 6.75902381 40 NPV 6 5 20 EAB 1.50 0.77

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