Chrysler is considering a cost reduction program The supplie

Chrysler is considering a cost reduction program. The suppliers must reduce the cost of the components that they furnish to Chrysler by 6% each year. (The total amount of savings would increase each year.) The initial costs:
Program Setup: $11,500,000
Feasibility Study (completed six months ago): 1,800,000
Supplier Training: 8,500,000
Chrysler is currently paying a total of $85,000,000 per year for components purchased from the vendors who will be involved in this program. (Assume that, if the program is not approved, the annual cost of purchased components will remain constant at $85,000,000 per year.) The program has been designed as a five-year initiative, and Chrysler\'s MARR for such projects is 15% (i_m). There will be annual operating expenses associated with the program for further training of vendors, updating internal documentation, and so on. Given the projected savings in purchased components, what would be the maximum annual operating expense for this program such that it is marginally justified? Assume that the EOY 1 cost for purchased components is $85,000,000.

a. What is the PW(Present Worth) if the program is approved?

b. What is the PW(Present Worth) if the program is not approved?

c. What is the maximum annual operating expense for this program?

Solution

Program setup - $11,500,000

Feasibility study- 1,800,000

Supplier Trainning-8,500,000

cost reduced by 6% per year of the components

Total cost of purchasing components =$85,000,000

minimum acceptable rate of return=15%

a) If the program is approved then the present worth be calculated by

Total cost=$85,000,000+$11,500,000+$1,800,000+$8,500,000=$106,800,000

net present worth is $106,800,000/(0.06)=$1,780,000,000

b)present worth if the program is not approved is $85,000,000

c) maximum annual operating expense for this program is approved by adding all cost which is equal to=$106,800,000