26 Jun CASE BACKGROUND
Case Background: A medium-scale food processing firm outsources its supply-channel transportation to external agencies for transporting firms finished products to distributors/retailers. The firm is deliberating whether to purchase and own transport vehicles now or continue with outsourcing the transport-service for the next 10 yars. A lump-sum of Rs 2,400,000 is available with the firm now due to accrual from past business operations; further the firm estimates that it can afford to pay up to Rs 171,000 per month towards supply-channel transportation of finished products. :Information Pertaining to Various Plans Available: • Towards outsourcing transportation-service and dont buy vehicles plan: Plan A The firm continues to outsource transportation-service paying a total service-charge of Rs 162,000 per month to external agencies, whence the firm will place the lump-sum money of Rs 2,400,000 into an investment instrument; additionally the firm will add to this investment at the end-of-each year the same amount of money as the monthly 15-year mortgage payments. • Towards buying and owning the vehicles, two financing plans using fixed-rate mortgages are currently available: Plan B 10% (of total price of the vehicles) down-payment now + monthly installment payment towards mortgage for 30-years at a nominal interest rate of 5.25% per year compounded monthly Plan C 10% (of price of the vehicles) down-payment now + monthly installment payment towards mortgage for 15-years at a nominal interest rate of 5.00% per year compounded monthly :Other General Information: • Total cost (price) of the required number of vehicles is Rs 19,800,000. • Total operating cost of the vehicles owned is Rs 30,000 per month. • A total initial (one-time) up-front fee for the vehicles bought is Rs 180,000. • Any money saved upon paying the down-payment or monthly payment will be invested that returns a nominal rate of 6% per year compounded monthly. • Total resale value of the vehicles owned falls by 30% at the end of 10th year. • No taxes are considered on proceeds from the savings or investments. • No inflation is considered in the analysis •
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