Make or Buy Happyland Construction by Mohd Rahman

Make or Buy

February 24, 2015

Exercise 3: Happyland Construction

Module 2 - Session 5

by

Mohd Rahman

Happyland Construction Make and Buy Calculation |

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1. Betty's Original Make Analysis (Total Cost of Ownership) | |

Calculation of Value of Crane After 10 Years (If Make/owned) | | |

Value End of year (after 5% depreciation) 1 | $10,450,000.00 | |

Value End of year (after 5% depreciation) 2 | $9,927,500.00 | |

Value End of year (after 5% depreciation) 3 | $9,431,125.00 | |

Value End of year (after 5% depreciation) 4 | $8,959,568.75 | |

Value End of year (after 5% depreciation) 5 | $8,511,590.31 | |

No more depreciation after 5 years | | |

Book value at the end of year 10 will be (A) | $8,511,590.31 | |

But Disposal value receivable will be (B) | $500,000.00 | |

Net loss of asset (A - B) | $9,011,590.31 | |

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Purchase Cost | | $11,000,000.00 |

Travel and Related Costs in Assessing Cranes and Making Recommendation: | | $150,000.00 |

Initial Training for 2 Crane Operators: $20,000 | | $20,000.00 |

Life time maintenance cost (10 years X Yearly Maintenance: $50,000) | | $500,000.00 |

Major Overhaul in 5 Years:(One time) | | $400,000.00 |

Life time Operating Costs (excluding operators): $100,000 x 10 years | | $1,000,000.00 |

Life time Wages and Benefits (operators): $200,000 x 10 years | | $2,000,000.00 |

Loss of asset due to depreciation and less disposal value as calculated above | | $9,011,590.31 |

Cost of internal time and effort already given | | $500,000.00 |

Total Cost of Ownership | | $24,581,590.31 |

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2. Buy Analysis of Sid | | |

Internal time and effort already given | | $500,000.00 |

10 Years of Payment to Digger Construction $1,500,000 per year | | $15,000,000.00 |

10 Years of Wages and Benefits of 2 Operators: $200,000 x 10 years | | $2,000,000.00 |

Initial Training for 2 Crane Operators: $20,000 | | $20,000.00 |...