11-38Outsourcing Call Centers; Strategy; Ethics; Present-Value Analysis (Chapter 12) Merchants Bank (MB) is a large regional bank operating in 634 locations in the southeastern United States. Until 2014, the bank operated a call center for customer inquiries out of a single location in Atlanta, Georgia. MB understood the importance of the call center for overall customer satisfaction and made sure that the center was managed effectively. However, in early 2013, it became clear that the cost of running the center was increasing very rapidly, along with the firms growth, and that some issues were arising about the quality of the service. To improve the quality and dramatically reduce the cost of the service, MB moved its call center to Bangalore, India, to be run by an experienced outsourcing firm, Naftel, which offers similar services to other banks like MB.

The Naftel contract was for 5 years, and in late 2017 it was time to consider whether to renew the contract, change to another call center service provider (in India or elsewhere), or bring the call center back to Atlanta.

Some important factors to consider in the decision:

• At the time of the decision in late 2017, assume that the value of the dollar was increasing relative to most other currencies.
• Recent worldwide events in the financial marketplace were starting to affect the banking business, and the outlook for growth for MB at the time had not been as rosy as it had been for the last few years. Top management and economic advisors for the bank had basically no idea what to forecast for the coming 5 years.
• At the time of the decision, the employment rate in Atlanta had been falling to the point where there was a good supply of talented employees who could have been recruited into the call center if the center were relocated back to Atlanta.
• The bank had just completed a new headquarters building in Atlanta and had a good bit of space in the building that MB had yet to lease. The outlook for the Atlanta economy was such that MB did not expect to lease much of this space for at least 3 years. If the call center were returned to Atlanta, it would occupy a space that could be rented for $100,000 per year, assuming there was a company that wanted to lease the space.
• If renewed, the Naftel contract would cost $4,200,000 per year for each of the next 5 years.
• The cost of salaries to staff the call center in Atlanta was expected to be $2,300,000 per year, the equipment would be leased for $850,000 per year, telecommunication services were expected to cost $500,000 per year, administrative costs for the call center were expected to be $600,000 per year, and the call centers share of corporate overhead was expected to be $400,000 per year.

Required

1. What is the 5-year raw (i.e., undiscounted) total cost for the Naftel option? What is the 5-year raw (i.e., undiscounted) cost of the Atlanta option? Round both answers to nearest whole dollar.

2. What is the discounted present-value cost of the Naftel option? What is the discounted present-value cost of the Atlanta option? (Note: For present-value [PV] calculations, assume a discount rate of 6%; use the formula at the bottom of Table 1, Appendix C, in Chapter 12 and in Excel to generate PV factors.)