Question

DMW, a German auto manufacturer, is considering the sourcing of certain components from India. The firm estimates a requirement of 150,000 units a year. The component is currently manufactured in- house at a cost of EUR 30. The Indian firm offers a four- year agreement to manufacture this component for rupee (INR) 1,500 per unit. The German firm also bears shipping costs of EUR 3 per component. Assume a discount rate of 9 percent. Spot EURINR equals 65. What is the NPV of savings from outsourcing?

Answer 1

In house-manufacturing cost per unit = EUR 30

In house-manufacturing cost for 150,000 units = 150,000 x EUR 30 = EUR 4,500,000

Purchasing cost per unit = INR 1,500 + shipping cost = EUR 1,500/65 + EUR 3

                                            = EUR 23.07692308 + EUR 3 = EUR 26.07692308

Outsourcing cost for 150,000 units = 150,000 x EUR 26.07692308 = EUR 3,911,538.46

Cost saving per year on outsourcing = EUR 4,500,000 - EUR 3,911,538.46 = EUR 588,461.54

Year	Cost savings(C)	PV Factor calculation	PV Factor @ 9 % (F)	PV (=C x PV)
1	EUR 588,461.54	1/(1+0.09)^1	0.917431193	EUR 539,872.97
2	588,461.54	1/(1+0.09)^2	0.84167999	495,296.30
3	588,461.54	1/(1+0.09)^3	0.77218348	454,400.28
4	588,461.54	1/(1+0.09)^4	0.70842521	416,880.99
			NPV	EUR 1,906,450.54

NPV of savings from outsourcing is EUR 1,906,450.54