Hello,

Please see below info for question.

The company has been growing steadily over the past 5 years, and the financials and future prospects look good. Your CEO has asked you to run the numbers. After doing some digging into the business, you have gathered information on the following: The estimated purchase price for the equipment required to move the operation in-house would be $500,000. Additional net working capital to support production (in the form of cash used in Inventory, AR net of AP) would be needed in the amount of $25,000 per year starting in year 0 and through all 5 years of the project to support production. The current spending on this component (i.e. annual spend pool) is $875,000. The estimated cash flow savings of bringing the process in-house is 20% or annual savings of $175,000. This includes the additional labor and overhead costs required. Your company has access to a credit line and could borrow the funds at a rate of 6%. Finally, the equipment required is anticipated to have a somewhat short useful life, as a new wave of technology is on the horizon. Therefore, it is anticipated that the equipment will be sold after five years for $25,000. (i.e. the terminal value).

the head of Operations, is concerned that instead of stabilizing the supply chain, it will just add another process to be managed, and will distract from the core competencies the company currently has. He feels the company should focus on improving communication and supply chain management with its current vendor, and he feels confident he can negotiate a discount of 4% off of the annual outsourcing cost of $875,000 if he lets it be known they are considering taking over this step of the process. As there is little risk associated with Owen's proposal due to no upfront capital requirements, a lower risk-free discount rate of 7% would be appropriate. Owen feels that any price reductions from the current vendor will last for five years. (NOTE: because there is no "investment", the Payback and IRR metrics are not meaningful...simply provide the NPV of the Savings cash flows).

What is the NPV?

Thank you for the help,