Question
Scenario: Olivia, the head of Operations, is concerned that instead of stabilizing the supply chain, it will just add another process to be managed, and
Scenario: Olivia, 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. She feels the company should focus on improving communication and supply chain management with its current vendor, and she feels confident he can negotiate a discount of 4% off of the annual outsourcing cost of $1,200,000 if she lets it be known they are considering taking over this step of the process. As there is little risk associated with Olivia's proposal due to no upfront capital requirements, a lower risk-free discount rate of 7% would be appropriate. Oliva 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).
Please calculate: (show all calculations of how you came up with the answer)
Nominal payback
Discounted payback
Net Present Value
and Internal Rate Return
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