Free Accounting Dissertations - But Many Times Make-or-buy Decision Is Not Based On Numbers Only. Companies
But many times make-or-buy decision is not based on numbers only. Companies make certain parts in-house also to keep strategic advantage.
Annexure I NPV calculations
Proposal S
Cost
100,000
Annual saving
12,500
Estimated life, yrs
10
Desired return
10%
Years
0
1
2
3
4
5
6
7
8
9
10
Costs
-100,000
Annual Savings
12,500
12,500
12,500
12,500
12,500
12,500
12,500
12,500
12,500
12,500
Cash flows
-100,000
12,500
12,500
12,500
12,500
12,500
12,500
12,500
12,500
12,500
12,500
Discounted cash flows
-100,000
11,364
10,331
9,391
8,538
7,762
7,056
6,414
5,831
5,301
4,819
NPV
-23,193
Proposal A
Cost
175,000
Annual saving
25,000
Estimated life, yrs
10
Desired return
10%
Years
0
1
2
3
4
5
6
7
8
9
10
Costs
-175,000
Annual Savings
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
Cash flows
-175,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
25,000
Discounted cash flows
-175,000
22,727
20,661
18,783
17,075
15,523
14,112
12,829
11,663
10,602
9,639
NPV
-21,386
Proposal M
Cost
250,000
Annual saving
75,000
Estimated life, yrs
10
Desired return
10%
Years
0
1
2
3
4
5
6
7
8
9
10
Costs
-250,000
Annual Savings
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
Cash flows
-250,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
75,000
Discounted cash flows
-250,000
68,182
61,983
56,349
51,226
46,569
42,336
38,487
34,988
31,807
28,916
NPV
210,843
Bibliography
Horngren, C.T., Sundem, G.L. and Stratton, W.O. (1999). Introduction to Management Accounting; Eleventh edition, Prentice hall International Inc.
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