GLOBAL SOURCING

1) The proposal mentioned is rejected since NPV (net cash flow-TCO)is negative. Please find out the actual rate of return in this caseif the desired rate of return is 20%.

Desired rate of return20.00%

Present year 1Year 2Year 3Year 4Year 5Year 6

Acquisition Cost-120000

Overhauling Cost-9000

Cash Inflows400004000040000400004000040000

Cash Outflows-7000-7000-7000-7000-7000-7000

Salvage Values7500

TOTAL-120000330003300024000330003300040500

Discounting Factor10.8333333330.6944440.5787040.4822530.4018780.334898

Discounted cash flows-1200002750022916.6713888.8915914.3513261.9613563.37

Net Present Value -12954.76

The actual rate of return calculated by excel against the projected cash flows, the IRR (Internal Rate of Return) comes out to be IRR15.66%

2) If as a sourcing Manager youare in a position to acquire this machine @ $100,000 from some other source in place of $120,000. Will your proposal be accepted? What would be the rate of return in the second case assuming other conditions remain same?

Desired rate of return20.00%

Present year 1Year 2Year 3Year 4Year 5Year 6

Acquisition Cost-100000

Overhauling Cost-9000

Cash Inflows400004000040000400004000040000

Cash Outflows-7000-7000-7000-7000-7000-7000

Salvage Values7500

TOTAL-100000330003300024000330003300040500

Discounting Factor10.8333333330.6944440.5787040.4822530.4018780.334898

Discounted cash flows-1000002750022916.6713888.8915914.3513261.9613563.37

Net Present Value 7045.24

IRR22.74%

Yes, Since the NPV is positive in this case therefore proposal would be accepted.