Calculate Scotts’ NPV for each of the following two options–continue production at Temecula or outsource to China!

Please answer the following questions in your memo:

1.   Utilize NPV as one of the tools to assist in the decision to “stay in the US” or “outsource to China.” Calculate Scotts’ NPV for each of the following two options–continue production at Temecula or outsource to China! Please note–follow the helpful hints below because some of the inputs to the problem are different from the actual case.

2.   List and rank the factors that you can quantify which would most affect the project’s outcome. Complete a sensitivity analysis (+ and -) on at least ONE of these factors for each scenario, Temecula, and China.  For example:

·       Transportation cost projections

·       Labor cost projections

·       Safety stock implications

·       Electrical cost assumptions

·       Impact of a 10-year analysis

·       Many other items!  (Note: You cannot use exchange rate fluctuations of the Yuan and the dollar).

3.   Assess qualitative factors that can also impact your decision utilizing one of the frameworks listed below: You must indicate which framework you have chosen.

·        “Strategic Sourcing from Periphery to Core,” Gottfredson, etc. approach

·       “Why Outsource?” Lynch approach

·       “Sourcing Decisions in a Supply Chain,” Chopra approach

·       Make vs. Buy Analysis Matrix presented by Fine in Clockspeed (from SCM 800)

·       Some other frameworks you prefer—this item must be pre-approved by me prior to submittal.

1. Based upon Questions 1-3 above, carefully explain and outline your recommendation and evaluation.

Sample Solution

Memo

To: Management

Subject: Decision on Outsourcing Production to China or Continuing Production at Temecula

This memo provides an evaluation of the decision to either continue production at Temecula or outsource to China based on financial, quantitative, and qualitative analysis.

1. NPV Analysis

The net present value (NPV) method is used to evaluate the profitability of an investment over time. NPV takes into account the initial investment, the expected cash flows over the life of the investment, and the required rate of return. The NPV calculation for each scenario is as follows:

Continued production at Temecula:

• Initial investment: $X
• Expected cash flows: $Y1, $Y2, $Y3, …, $Y10
• Required rate of return: R
• NPV = (Y1 / (1 + R)^1) + (Y2 / (1 + R)^2) + … + (Y10 / (1 + R)^10) – X

Outsource production to China:

• Initial investment: $A
• Expected cash flows: $B1, $B2, $B3, …, $B10
• Required rate of return: R
• NPV = (B1 / (1 + R)^1) + (B2 / (1 + R)^2) + … + (B10 / (1 + R)^10) – A

If the NPV of the continued production at Temecula is greater than that of outsourcing to China, it would be more profitable to continue production at Temecula. If the NPV of outsourcing to China is greater, it would be more profitable to outsource production to China.

2. Sensitivity Analysis

The factors that can most affect the project’s outcome are labor costs, transportation costs, safety stock implications, electrical costs, and the impact of a 10-year analysis. Out of these factors, labor costs have the greatest impact on the project’s outcome, and therefore, a sensitivity analysis will be performed on labor costs.

Continued production at Temecula:

• If labor costs increase by 10%, NPV = …
• If labor costs decrease by 10%, NPV = …

Outsource production to China:

• If labor costs increase by 10%, NPV = …
• If labor costs decrease by 10%, NPV = …

3. Qualitative Factors…Order a customized and more comprehensive answer here