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

Question

Compare 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 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 in $ million units. Contract License In-house First cost, $ Annual cost, $ per year Annual revenue,Sper year Life, years -20 -0.2-4 -1 2.51.3 10

Explanation / Answer

Contract 1 2 3 4 5 First Cost 0 Annual cost -1 -1 -1 -1 -1 -1 Annual revenue 2.5 2.5 2.5 2.5 2.5 2.5 2.272727 2.066116 1.878287 1.707534 1.552303 Sum of PV 9.476967 Annual cost -5 Total profit 4.476967 License 1 2 3 4 5 6 7 8 9 10 First Cost -2 Annual cost -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 Annual revenue 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.181818 1.07438 0.976709 0.887917 0.807198 0.733816 0.667106 0.60646 0.551327 0.501206 Cost -2 Sum of PV 7.987937 Annual cost -2 Total profit 3.987937 In house @10 YEARS 1 2 3 4 5 6 7 8 9 10 First Cost -20 Annual cost -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 Annual revenue 8 8 8 8 8 8 8 8 8 8 8 7.272727 6.61157 6.010518 5.464108 4.967371 4.515791 4.105265 3.732059 3.392781 3.084346 First cost -20 Sum of PV 49.15654 Annual cost -40 Total profit -10.8435 In house @5YEARS 1 2 3 4 5 First Cost -20 Annual cost -4 -4 -4 -4 -4 -4 Annual revenue 8 8 8 8 8 8 7.272727 6.61157 6.010518 5.464108 4.967371 First cost -20 Sum of PV 30.32629 Annual cost -20 Total profit -9.67371 (WE CAN SELECT CONTRACT BASING ON THIS ANALYSIS)

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