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In: Accounting

A business process outsourcing has the following avoided costs, incurred costs, and other characteristics: Costs avoided...

A business process outsourcing has the following avoided costs, incurred costs, and other characteristics:

  • Costs avoided by outsourcing:
    • Salaries, wages, and benefits = $450,000 a year
    • Furniture and equipment = $100,000 a year
    • Supplies = $150,000 a year
    • Software = $10,000 a year
    • Facility rent/lease = $75,000 a year
    • Utilities and communications = $20,000 a year
    • Transition revenue now
      • Sale of unused assets = $10,000
  • Costs incurred by outsourcing:
    • Payments to supplier = $440,000 a year
    • Contract administration = $30,000 a year
    • Transition cost now
      • Severance pay = $40,000
  • 4-year time horizon
  • Discount rate = 4% per year
  • Assume all cash flows occur at the beginning of each year
  • Assume “now” is the beginning of Year 1.

Use Excel to answer the following question. Based on the NPV of the cash flows, should this business process be outsourced?

Please show all the formulas used in excel.

Solutions

Expert Solution

NPV of Outsourcing Calculation
Time line Now : Year 1 Beginning Year 2 start Year 3 start Year 4 start
Costs Avoided by outsourcing :
Salaries & Wages             450,000           450,000          450,000           450,000
Furniture & Equipment             100,000           100,000          100,000           100,000
Supplies             150,000           150,000          150,000           150,000
Software               10,000             10,000             10,000              10,000
Facility Rent/Lease               75,000             75,000             75,000              75,000
Utilities/Communications               20,000             20,000             20,000              20,000
Transition Revenue Now
Sale of unused asset               10,000
Costs incurred by Outsourcing
Payment to Supplier           (440,000)         (440,000)         (440,000)          (440,000)
Contract Administration             (30,000)           (30,000)           (30,000)            (30,000)
Transition cost Now:
Severance Pay             (40,000)
Total Net Cash flow             305,000           335,000          335,000           335,000
Years for discounting                        -                         1                      2                       3
PV factor @4%                         1             0.9615            0.9246             0.8890
PV of Net Cash flow             305,000           322,115          309,726           297,814
NPV of Net cash flow =         1,234,655
As the NPV of outsourcing is positive, the business process should be outsourced.

ekkarill92 answered 3 years ago
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