Izync, Inc., a defense contractor, recently won a 5-year contract from the Department of Defense (DoD). There
Question:
Izync, Inc., a defense contractor, recently won a 5-year contract from the Department of Defense (DoD). There are three available options the company could use to manage this contract as a project. The options under consideration are:
Project 1:
- This requires the purchase of a start-up company, Ozig LLC, to manage the 5-year contract. At the end of the 5-year contract Izync, Inc. has the option of selling Ozig, Inc. or integrating it into Izync, Inc. operations.
Project 2:
- This requires the creation of a special division, Secta, at Izync, Inc. with responsibility to manage the 5-year contract and associated deliverables.
Project 3:
- This requires entering into partnership agreement with a third party, DTG Systems, Inc. to manage the 5-year contract.
The estimated annual benefits and related costs for each project are shown below. Because the total estimated cash flow for each project at the end of the 5-year period is the same, Izync's Chief Financial Officer has asked you to provide her with a recommendation on which project to select.
Project 1: Purchase of Ozig, Inc.
| Year 1 ($) | Year 2 ($) | Year 3 ($) | Year 4 ($) | Year 5 ($) | Total ($) |
Benefits | 0 | 13,000,000 | 14,000,000 | 16,000,000 | 18,000,000 | 61,000,000 |
Related Costs | 20,500,000 | 2,000,000 | 1,800,000 | 1,600,000 | 1,500,000 | 27,400,000 |
Cash Flow | (20,500,000) | 11,000,000 | 12,200,000 | 14,400,000 | 16,500,000 | 33,600,000 |
Project 2: Secta
| Year 1 ($) | Year 2 ($) | Year 3 ($) | Year 4 ($) | Year 5 ($) | Total ($) |
Benefits | 5,000,000 | 8,000,000 | 10,000,000 | 10,000,000 | 10,000,000 | 43,000,000 |
Related Costs | 2,500,000 | 2,000,000 | 1,800,000 | 1,600,000 | 1,500,000 | 9,400,000 |
Cash Flow | 2,500,000 | 6,000,000 | 8,200,000 | 8,400,000 | 8,500,000 | 33,600,000 |
Project 3: DTG Systems, Inc. Partnership
| Year 1 ($) | Year 2 ($) | Year 3 ($) | Year 4 ($) | Year 5 ($) | Total ($) |
Benefits | 2,000,000 | 12,000,000 | 15,000,000 | 16,000,000 | 18,000,000 | 63,000,000 |
Related Costs | 7,000,000 | 5,600,000 | 5,600,000 | 5,600,000 | 5,600,000 | 29,400,000 |
Cash Flow | (5,000,000) | 6,400,000 | 9,400,000 | 10,400,000 | 12,400,000 | 33,600,000 |
Required:
Use the Net Present Value (NPV) method to determine which project should be selected
Assume a 10% discount rate without inflation