Question
In: Accounting
Metro Bank has 20 branches in the greater Tusla area. Currently, the company has a fairly...
Metro Bank has 20 branches in the greater Tusla area. Currently, the company has a fairly extensive IT department and uses it's own servers to process transactions and store data. The annual budget for IT is $2,500,000. James Baker, the chief financial officer at Metro, is considering outsourcing some of the IT work to CloudTech Services. Baker has a quote from CloudTech for $700,000 per year. He estimates that if he goes with CloudTech he'll have the following savings:
1. The Bank will avoid spending $300,000 to upgrade servers and related software at the start of the next year. The servers have a three-year life with no salvage value and are depreciated using the straight-line method.
2. IT worker salaries will be reduced by $400,000 per year.
3. There will be other miscellaneous savings of $100,000 per year.
Required: Assuming a three-year time horizon and a tax rate of 20%, what is the NPV of outsourcing to CloudTech using a discount rate of 10%? Are there any potential "soft benefits to outsourcing that are not captured in the NPV value analysis? Assume that the $300,000 to upgrade servers is at the start of year 1. The $700,000 expenditure to CloudTech, the savings of IT worker salaries, and other savings are at the end of years 1,2, and 3.
Solutions
ekkarill92 answered 1 year agoRelated Solutions
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