Question
ADVANCED EXERCISE: The first year of the holding period of the investment has ended and it is now time to assess the next year. The
ADVANCED EXERCISE: The first year of the holding period of the investment has ended and it is now time to assess the next year. The assessment is based on the assumption that the company's sales will remain the same as the sales of the measurement service. The assessment, therefore, concerns organizing the company's internal processes - either a possibility to use subcontracting and to make a divestment or to continue producing the service. The markets for the measurement service have since developed and it can now be bought and sold for a price of 103 /h. The company considers ending its own activity at the beginning of the next year. According to its plan, the company would buy the measuring service from a specialized company for its need in its own customer projects, 750 hours per year. The user of the measuring equipment could be laid off or transferred elsewhere in the company in a way that the hiring of additional workforce could be avoided. Other fixed costs of use would also be left out. In addition, the measurement equipment could be sold during the next year for a price of 75000 (this is realized at the end of the year in the books).
1. If the company decides to move to subcontracting the measurement service, how much would this decision affect the operating income of the next year to the nearest euro (increase +; decrease -)?
2. What is the effect of the previous decision on the next year's cash flow of the company to the nearest euro [increase +; decrease -]?
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