Problem:
Demonstrate the ability to apply time value of money principles in comparing decision alternatives based on both total cash flow and incremental cash flow.
BlueJay Manufacturing finally received its quotes from the suppliers for the outsourcing of the production for its new line of products. As Butler and his team prepared to meet with the finance department to evaluate and compare the supplier quotes, the manufacturing group came up with a proposal at the last minute that it thought would allow the company to keep the work in house, potentially saving jobs and at the same time saving the company money. While it appeared that the manufacturing proposal could allow the company to save on manufacturing costs per unit, the proposal did require the company to spend a significant amount of capital at the onset of the project.
The project was expected to last 4 years, and the company would need to spend $1,200,000 the first year in tooling, equipment, and startup costs, but it would show a profit of $350,000 the first 3 years and $500,000 the last year of the project. Supplier A only required $250,000 for tooling at startup from BlueJay; however, BlueJay would only save $200,000 per year over the life of the project. Supplier B required no startup costs from BlueJay because it had captured the tooling and startup costs in its piece price, but in this scenario, BlueJay would only save $150,000 a year over the life of the project. The third supplier, supplier C, required $250,000 in startup and tooling costs from BlueJay. Supplier C offered BlueJay a schedule of savings that started at $100,000 per year, and that amount went up by $100,000 per year for the life of the project. Your assignment is to assist Butler and the finance team to evaluate the options available to BlueJay.