In the given case Liquid Chemical Company manufactures and sells a
range of high-grade products. Many of these products require careful packaging. The company has a special patented lining made that it uses in specially designed packing containers. Mr. Walsh the general manager was carefully looking at the problem and as a matter of solution he came up with the four alternatives: * Alternative A: It is the status quo. (i.e., Liquid Chemical Co. will continue making the containers and performing maintenance.) * Alternative B: Liquid Chemical Co. will continue making the containers, but it will outsource the maintenance to Packages, Inc. * Alternative C: Liquid Chemical Co. will buy containers from Packages, Inc., but it will perform the maintenance. * Alternative D: It is completely outsourced. Packages, Inc. will make the containers and provide the necessary maintenance. The analysis of each of the four alternatives is given below in terms of the NPV: Option A | Year | 1 | 2 | 3 | 4 | 5 | Cost of GHL net of tax savings | | | | | -144000 | Purchase of other materials | -500000 | -500000 | -500000 | -500000 | -500000 | Supervisor | -50000 | -50000 | -50000 | -50000 | -50000 | Worker | -450000 | -450000 | -450000 | -450000 | -450000 | Rent of warehouse | -85000 | -85000 | -85000 | -85000 | -85000 | Maintenance | -36000 | -36000 | -36000 | -36000 | -36000 | Other Expense | -157500 | -157500 | -157500 | -157500 | -157500 | managers Salaries | -80000 | -80000 | -80000 | -80000 | -80000 |
Less: Initial Inflow | 0 | Net Cash Outlay | -1068321 | Based on the above analysis following summary can be drawn: Option | NPV | Option A | $ (2,735,501.80) | Option B | $ (3,102,910.26) | Option C | $ (2,089,010.05) | Option D | $ (1,068,321.40) | So the lowest NPV is of option D. So the company should go ahead with option d and as a result it should completely outsource. Packages, Inc. will make the containers and provide the necessary maintenance.