Description
Unformatted Attachment Preview
Purchase answer to see full attachment
Explanation & Answer
View attached explanation and answer. Let me know if you have any questions.
Solution to ESI case study
1. Calculate the capital budgeting decision metrics for the proposed expansion in ESI owned
computer equipment. Calculate each of NPV, IRR, MIRR, Payback and Profitability Index.
Show all calculations including initial outlay, annual differential cash flows, terminal value, and
weighted average cost of capital. (30 points).
Answer: Below are the values calculated as per excel sheet:
NPV
IRR
MIRR
Payback Period
Profitability Index
Terminal Value
Weighted average cost of capital
22,23,215 USD
80%
43%
1.75 Years
4.4
28,91,831 USD
6.44%
2. In addition to the capital budgeting calculations, discuss at least three important qualitative
issues associated with the proposed purchase of additional computer equipment. (10 points).
Answer: Three important qualitative issues that must be considered apart from capital budgeting
calculations are:
1. Maintenance contract for self-owned computers: Usually the leased computers come with
a maintenance contract as part of scope of work from the service provider. In case of switching
to self-owned computers, a separate maintenance contract needs to be done. Cost implications
and operational implications need to be considered in that case.
2. System Upgradation: As the computers keep updating, it is possible that there might be a
need of upgradation of computer models in a year or two to keep pace with latest technology.
Capital investment on such upgradation needs to be considered.
3. Insurance to the assets: As part of self-owned assets, these computers need to be insured
against fire and other accidents. Cost implications need to be added.
3. Calculate the capital budgeting decision metrics for the proposed outsourcing of ESI’s online
help desk to New Delhi, India. Calculate each of NPV, IRR, MIRR, Payback and Profitability
Index. (30 points).
Answer: Below are the values calculated as per excel sheet:
NPV
IRR
MIRR
Payback Period
Profitability Index
Terminal Value
Weighted average cost of capital
14,99,996 USD
59%
31%
2.84 Years
6.2
40,07,413 USD
8.2 %
4. Discuss the challenging issues Rachel may create for ESI by outsourcing online help services
to an overseas location such as India. In the discussion include any biblical moral principles
that apply to ESI’s decision. (10 points).
Answer: By outsourcing online help services to Delhi, Rachel runs the risk of lax monitoring, time
gap in response and possible quality degradation in terms of service delivery. These issues must be
addressed on priority to ensure a professional service delivery which is not affected by geography,
time and work culture difference. Otherwise, ESI would run the risk of losing its service value in long
run.
Rachel also runs the risk of creating less employment opportunities for domestic market. Outsourcing
will lead to more employment opportunities for Indians at the cost of reduced opportunities for native
people in the home country. This goes against the moral principle of “giving back to society”.
Second issue will be labour law issues. By outsourcing, ESI is hiring cheaper labor in New Delhi. In
comparison this labour is ready to work at reduced cost and at reduced employment benefit...