Engineering Economy (8th Edition) Chapter 4, Problem 31P

Question: Hemisphere, LLC is planning to outsource its 51-person information technology (IT) department to Dyonyx. Hemisphere’s president believes this move will allow access to cutting-edge technologies and skill sets that would be cost prohibitive to obtain on its own. If it is assumed that the loaded cost of an IT employee is $100,000 per year and that Hemisphere will save 25% of this cost through outsourcing, determine the present worth of the total savings for a 5-year contract at an interest rate of 6% per year, compounded monthly.

Solution:

Effective interest rate accounts for compounding and is known as annual percentage yield (APY). The formula to calculate the effective annual interest rate is

e = (1+i/m)^m - 1

where m is no of compounding period in given time.

Annual effective interest rate i is:

i = \left ( 1 +\frac{6\%}{12} \right )^{12} -1

=1.06167-1
=0.06167

Annual saving A is 100,000 x 25% = 25000, n is 5

P=25,000(P/A,6.167%,5)
25,000(4.1932)
= $104,830

Leave a Reply

Your email address will not be published. Required fields are marked *