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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

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.

Question:

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

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