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