Part two

MH is also considering the possibility of outsourcing non-core activities. As a test case, the company decided to explore outsourcing all of its IT needs. The initial response of the IT department to the possibility of outsourcing was negative. They expressed concern over the recent large investment of £100,000 that the company had made in replacing all its computer systems last year - they expected this equipment would service the company’s IT requirements for four years. Obviously there was also deep concern over job security. Currently the IT department has ten staff earning, on average, £30,000 per year.

The process involved the selection of a shortlist of vendors which the company felt to be capable of handling such a contract. The process identified two possible vendors, Geek Limited and Micro Limited, who it was felt to best understand the philosophy and objectives of the company.

Further detailed negotiations were carried out with Geek Limited and Micro Limited.

·         Geek Limited proposed a three year initial contract at a fixed price of £250,000 per annum [payable in advance]. Geek Limited agreed to take on eight of the ten staff in the IT department maintaining the terms and conditions they held with MH. Of the remaining two staff one, Charles Smith, was eager to take early retirement and the other was to be retained within Exton Limited, at a salary of £30,000 to assist with management of the contract.

·         Micro Limited offered a five year initial contract costing £250,000 in year one but only £200,000 per annum thereafter (all sums payable in advance). The contract involves Micro Limited being given MH’s existing IT equipment.. Micro Limited believes that with preventative maintenance this equipment will last the five years of the contract. Micro Limited agreed to take on nine of the ten staff in the IT department maintaining the terms and conditions they held with Exton Limited. Given the contract terms and conditions it is not deemed necessary to have a member of staff to assist with managing the contract and therefore MH would agree to Charles Smith leaving on early retirement.

Irrespective of the contractor chosen, MH would need to create a post of contract manager and recruit a suitable person at an estimated annual salary of £48,000 as the company did not currently have anyone with those skills in-house.

It should also be noted that:

• If Charles Smith retired two years early the company would have to pay an extra £20,000 lump sum into the pension scheme.
• The building housing the IT department was on a five year lease and the company was committed to an annual rental of £10,000 per year for that period. This building could be sublet if IT were outsourced generating £4,000 in the first year, £8,000 in the second and £10,000 in the subsequent years of the lease.
• Current forecasts of consumables in the IT department are £5,000, £6,000 and £7,000 over the next three years. The cost is forecast to remain at £7,000 in years four and five.
• The resale value of the IT equipment bought last year is currently £50,000.
• The current stock of computer specific spares and equipment cost £5,000 and is now worthless.
• Annual overheads for the IT department are £27,000 per year. 60% of the overhead varies with staff numbers, the remaining 40% is a share of central overhead charges.
  

Assume that unless otherwise indicated cash flows occur at the end of the year in which they arise. The discount rate for evaluating projects used by MH is 12%, although the average weighted average cost of capital is only 10%. Management use this higher figure of 12%  to ensure that marginal projects are not accepted. Ignore tax implications.

求NPV(净现值），internal rate of return(内部收益率），payback period（回收期）