Chrysler is considering a cost reduction program. The suppliers must reduce the

Question

Chrysler is considering a cost reduction program. The suppliers must reduce the cost of the components that they furnish to Chrysler by 6% each year. (The total amount of savings would increase each year.) The initial costs: Program Setup: $11,500,000 Feasibility Study (completed six months ago): 1,200,000 Supplier Training: 8,500,000 Chrysler is currently paying a total of $85,000,000 per year for components purchased from the vendors who will be involved in this program. (Assume that, if the program is not approved, the annual cost of purchased components will remain constant at $85,000,000 per year.) The program has been designed as a five-year initiative, and Chrysler's MARR for such projects is 15% (im). There will be annual operating expenses associated with the program for further training of vendors, updating internal documentation, and so on. Given the projected savings in purchased components, what would be the maximum annual operating expense for this program such that it is marginally justified? Assume that the EOY 1 cost for purchased components is $85,000,000.

Explanation / Answer

Setup Cost $    11,500,000.00 Cost of Feasibility Study $       1,200,000.00 Supplier Training $       8,500,000.00 Initial Cost of the program $    21,200,000.00 Annual Savings from Purchase of Components = $85,000,000 x 6/100 $       5,100,000.00 Present Worth Factor in 5 years at 15% 3.3522 Present Valu of Annual Savings $    17,096,220.00 ($5,100,000 x 3.3522) Present Value of Initial Setup cost $    21,200,000.00 Net Present Value of Savings $    (4,103,780.00) Present Worth with Cost Reduction Program Cash Outflows PV factor Present Year Component Cost Program Cost Cash Savings Net cash outflows at 15% Worth 0 85000000 $    21,200,000.00 $       5,100,000.00 $    101,100,000.00 0.8696 $    87,916,560.00 1 85000000 $    21,200,000.00 $       5,100,000.00 $    101,100,000.00 0.7561 $    76,441,710.00 2 85000000 $    21,200,000.00 $       5,100,000.00 $    101,100,000.00 0.6575 $    66,473,250.00 3 85000000 $    21,200,000.00 $       5,100,000.00 $    101,100,000.00 0.5718 $    57,808,980.00 4 85000000 $    21,200,000.00 $       5,100,000.00 $    101,100,000.00 0.4975 $    50,297,250.00 Total Worth $ 106,000,000.00 $    25,500,000.00 $    505,500,000.00 $ 338,937,750.00 Present Worth with Cost Reduction Program PV factor Present Year Component Cost at 15% Worth 0 85000000 0.8696 $    73,916,000.00 1 85000000 0.7561 $    64,268,500.00 2 85000000 0.6575 $    55,887,500.00 3 85000000 0.5718 $    48,603,000.00 4 85000000 0.4975 $    42,287,500.00 Total Worth $ 284,962,500.00 Present Worth if Program approved $ 338,937,750.00 Present worth if program does not approved $ 284,962,500.00

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.