You have just taken over the management of an organization where cleaning services are traditionally outsourced for 1,240,000 annually, including:

s/n	Expenditure	Value in
1	Payroll and replacement costa for 63 full-time employees	836,000
2	Consumables	80,000
3	Personal hygiene products (toilet paper, hand towels, sponges)	31,000
4	Tools and cleaning machines (depreciation, damage, maintenance)	7,000
5	Uniforms (purchase and washing)	3,000
6	Administrative costs	28,000
7	Contract turnover	15,000
8	VAT 24%	240,000
	Total	1,240,000

a

In case of absence (sick leave etc.) the contractor has to replace the absentee. Thus, there are no fluctuations regarding the quantity of cleaning services, which means that 2,520 man-hours (63 people x 5 days per week x 8 hours per day) are provided for each one of the 52 weeks of the year.

Alternatively, the organization may discontinue the outsourcing contract, recruit cleaners and purchase cleaning materials and equipment. In this case, you estimated the following costs:

Average labor cost of 1,270 / employee / month (12 months / year), which raises by 4% on completion of 3 years of work.

Supply of materials and operating costs similar to those of the contractor (s/n 2,3,5) of 140,000 / year.

Acquisition of cleaning equipment at 54,000 of a 5-year useful life, at the end of which it will not be usable.

Equipment maintenance and repairs at 1,000 / year.

Administrative costs at 4,000 / year.

Questions

i) If you decide to stop outsourcing and hire 63 people, how will the quantity of cleaning services be affected?

ii) Under the basic scenario you hire 70 people. Is there any financial benefit in terms of present value? Consider that cost of capital stands for 4%.

iii) What is the IRR of the investment under the basic scenario?

iv) If labor cost eventually raises by 3.5% (instead of 4%) on completion of 3 years of work and the cost of equipment is higher by 5,000, do you differentiate your decision?

v) If you had underestimated the cost of capital by 1% (new discount rate 5%), do you differentiate your decision?

vi) What is your final decision taking into account all 3 scenarios of questions ii, iv and v?

vii) If your organization is actually a public hospital and you have recently read the study by Elkomy et al. (2019), what is your final decision?