COST-BENEFIT ANALYSIS 1

Memo

To:

From:

CC:

Date:

Subject: Make-Or-Buy

In the above project, I have keenly evaluated the project and I can recommend that the

project is viable since NPV for each scenario is greater than 0, hence positive cash flows. This

means that the project benefits are greater than the costs involved. Numerous factors supported

this recommendation. The first factor is the nominal payback. As an effective determinant of

feasibility in a project, such periods are well within the project's full-blown period, which is five

years before an expected technological shift. In Payback analysis, shareholders are provided with

information regarding the maximum period they will wait for the investment to get back their

money. The lesser the payback period, the viable the project becomes. However, this model has a

few known weaknesses that make it not to be the only tool guiding decision-making. One of the

significant shortcomings of payback analysis is that it never recognizes returns after the

investment is paid back. Also, it concentrates a lot of biases on the time of investment, not

knowing that some business models take a lot of time to gain substantial market dominance. It is

for such reasons that the business considered analysis of IRR and NPV for the final

recommendation. The Discounted Cash Flow (DCF), issues projections on the expected cash

flows of the project and discounts them based on the present value. It informs on the difference

between the current value of cash inflows and the current value of cash outflows over a definite
COST-BENEFIT ANALYSIS 2

period. The NPV analysis was instrumental in influencing the final recommendation issued in

this paper because no other report comes close to the potential reality like it. It offered insights

into the expected value creation capability of the project in a definite dollar amount. The

project’s positive NPV, which is an indication of the fact that the project is profitable as far as

investment planning and capital budgeting are concerned. Lastly, IRR reflects the target the

company sets on the perspectives of various characteristics of the company viewed by different

investors.

The analysis process depended on various data that were availed by senior shareholders

holding different strategic positions as far as this project is concerned. For instance, it was

extremely vital to obtain perspectives from departments such as accounting, sales, and marketing

and engineering, which largely comprises the production unit of the firm. Also, opinions

collected from product managers and operations formed part of primary data as we moved into

the actual analysis. There were also originally provided data by the investment committee,

together with others from the finance department resulted in a data set that is now providing this

recommendation.

In assumption cost-effectiveness or its business viability, economies of scale,

correct visibility of the overall process, high profitability, and also a high degree of control over

puts are the main benefits of the project. On the other hand, the project presents a number of

risks, including challenges related to the achievement of environmental compliance, supply chain

challenges, and high rates of technological depreciation. The analysis models that influenced the

decision communicated in this memo also have known weaknesses that may catch up with the

implementation of the project. In other words, it is common knowledge that projects, as

envisaged on paper, presents additional challenges during actual implementation.

COST-BENEFIT ANALYSIS 3

The financial scenario that the analysis process dealt with comprised estimated

equipment whose purchase price $ 750000; additional networking capital to support production

is estimated at $35000per year commencing in year 0 and through all five years of the project to

support production. Also, there was annual spending on the component currently stands at $875,

000, bringing the process in-house will attract an estimated annual savings of 20% which

translates to $240,000, the company qualified for a credit that would attract 6% interest rate and

equipment terminal value after 5 years $35, 000. The analysis took care of five different

scenarios, which eventually provided a number of outcomes leading to the recommendation

communicated herein.

In summary, the question of make-or-buy presents uncertainty to the

management of manufacturing organizations even when analysis plus another considerable basis

of decision making loudly tell the option to go with. In conclusion, it is safe if the company

considers making over buying as recommended in the opening statement. The analysis

considered models such as payback period, NPV, and IRR to arrive at a decision.