The ADJO Security Services Company, a for-profit entity, is examin- ing two different capital initiatives. ADJO is expanding its services into a new city and must advertise its presence and offered services. ADJO has enough financial resources to pursue only one marketing plan. The costs of the first marketing plan are delineated as given in Table 17.6.
Table 17.7 shows the anticipated benefit values of the first market- ing plan.
Table 17.6: Costs of First Marketing Plan
|
Item
|
Cost per Item
|
Quantity
|
System One Cost
|
|
Retainer fee
|
$5000.00
|
1
|
$5000.00
|
|
Market study
|
$2000.00
|
1
|
$2000.00
|
|
Media methods:
|
$725.00
|
1
|
$725.00
|
|
Handbills
|
$0.50
|
1000
|
$500.00
|
|
Mail flyers
|
$1.45
|
25,000
|
$36,250.00
|
|
T-shirts
|
$5.00
|
100
|
$500.00
|
|
Bumper stickers
|
$0.50
|
1000
|
$500.00
|
|
Radio advertising
|
$90.00
|
50
|
$4500.00
|
|
Newspaper advertising
|
$1000.00
|
1
|
$1000.00
|
|
Television advertising
|
$700.00
|
1
|
$700.00
|
|
Celebrity endorsement
|
$1000.00
|
1
|
$1000.00
|
|
|
|
Total:
|
$52,675.00
|
Table 17.7: Anticipated Benefits of the First Marketing Plan
|
Item
|
Benefit per Item
|
Quantity
|
System One Benefit
|
|
Increased clientele
|
$12,000.00
|
1
|
$12,000.00
|
|
Increased market presence
|
$20,000.00
|
1
|
$20,000.00
|
|
Potential crime reduction
|
$17,500.00
|
1
|
$17,500.00
|
|
Increased public awareness
|
$22,000.00
|
1
|
$22,000.00
|
|
Increased profits
|
$31,000.00
|
1
|
$31,000.00
|
|
|
|
Total:
|
$102,500.00
|
The second marketing plan is more robust and still satisfies the basic requirements of the expansion strategy. Its costs are specified in Table 17.8.
Although this system is more robust, many of the anticipated benefits are unchanged, whereas others are changed. Table 17.9 shows the characteristics of the anticipated benefits of the second marketing plan.
Given these basic attributes of costs versus benefits regarding both potential marketing plans, perform a cost-benefit analysis using the cost-benefit ratios of both plans. Based on the outcomes of these ratios, which marketing plan represents the best investment for ADJO?
Table 17.8 Costs of Second MarketingPlan
|
Item
|
Cost per Item
|
Quantity
|
System Two Cost
|
|
Retainer fee
|
$5000.00
|
1
|
$5000.00
|
|
Market study
|
$2000.00
|
1
|
$2000.00
|
|
Media methods:
|
$725.00
|
1
|
$725.00
|
|
Handbills
|
$0.50
|
3000
|
$1500.00
|
|
Mail flyers
|
$1.45
|
25,000
|
$36,250.00
|
|
Hats
|
$2.00
|
200
|
$400.00
|
|
Balloons
|
$0.50
|
1000
|
$500.00
|
|
Key chains
|
$1.00
|
1000
|
$1000.00
|
|
T-shirts
|
$5.00
|
100
|
$500.00
|
|
Bumper stickers
|
$0.50
|
2000
|
$1000.00
|
|
Radio advertising
|
$90.00
|
50
|
$4500.00
|
|
Newspaper advertising
|
$1000.00
|
2
|
$2000.00
|
|
Internet advertising
|
$1000.00
|
3
|
$3000.00
|
|
Television advertising
|
$700.00
|
5
|
$3500.00
|
|
Celebrity endorsement
|
$1000.00
|
2
|
$2000.00
|
|
|
|
Total:
|
$63,875.00
|
Table 17.9: Anticipated Benefits of the Second Marketing Plan
|
Item
|
Benefit per Item
|
Quantity
|
System Two Benefit
|
|
Increased clientele
|
$21,000.00
|
1
|
$21,000.00
|
|
Increased market presence
|
$20,000.00
|
1
|
$20,000.00
|
|
Potential crime reduction
|
$27,000.00
|
1
|
$27,000.00
|
|
Increased public awareness
|
$22,000.00
|
1
|
$22,000.00
|
|
Increased profits
|
$38,500.00
|
1
|
$38,500.00
|
|
|
|
Total:
|
$128,500.00
|
1. The following hypothetical example necessitates the use of the NAL method. The ADJO Prison Corporation is considering a decision to either purchase or lease a fleet of motorcycles. The following condi- tions describe the decision domain:
• ADJO may obtain the fleet of vehicles for $7.25 million.
• ADJO anticipates a commitment period of at least 5 years.
• ADJO may borrow $7.25 million at a rate of 11.5% (before taxa- tion) to obtain the fleet.
• ADJO is a for-profit entity whose tax rate is 35.0%.
• If ADJO purchases the fleet, it will be responsible for the costs of maintenance. These maintenance costs are estimated to be
$801,000 annually and are due at the beginning of each year.
• If the lease option is chosen, then the lessor will retain ownership of the vehicle fleet and will perform maintenance for no additional cost.
However, if ADJO leases the fleet for 5 years, an addi- tional fee of $2,200,000.00 will be necessary. This fee is due at the beginning of each year annually.
• If ADJO purchases the vehicle f leet, it may experience a before-taxation salvage value of $600,000.00.
Although ADJO may examine its courses of action manually, it will employ an electronic spreadsheet to determine the NAL outcome. Based on the preceding information, is it better for ADJO to lease or to purchase its desired resource?
2. Some municipalities may obtain assets through the issuances of bonds, outright purchases from existing funds, or leases. Compare and contrast these three methods. Based on your discussions, which situations are the most appropriate for each form of resource procurement?
3. Examine the resource procurement activities of a local law enforce-mentagency. Determine which assets were either leased orpurchased. Discuss the advantages and disadvantages that the organization received from either the leasing or the purchasing of the assets.
4. The ADJO Security Corporation may either purchase or lease a new security system. It may lease the system for a period of 5 years for $20,450.00 annually. Upon the termination of the lease, ADJO would own the resource. If ADJO decides to purchase the computer system, it may buy it for $97,500.00. An associated rate of 4.2% is applicable. Given these data, perform a lease-versus-purchase analysis, and recommend whether ADJO should lease or purchase the security system.