MODULE 2 EXCERCISE 3 HAPPYLAND CONSTR

Module 2: Exercise #3 – Happyland Construction

Happyland Construction Inc. is an engineering firm involved in design and construction of oil shale plants. With their growing operations, Happyland needs to invest on a new crane (GargantuLift 6000) to be used on site. After financially analyzing their options, Happyland is left with a decision whether to outsource with a supplier or produce in-house. Below are the analysis done to compare both options:

Make Analysis

Internal Time & Effort - $500,000
Travel and Related Cost in Assessing Cranes and Make Recommendation - $150,000
Initial Training for 2 Crane Operators - $20,000
Pre-Transaction TOTAL - $670,000

Purchase Cost - $11,000,000
Discounted Factor – 0.95
Discounted Value - $550,000
Discounted Rate – 5%
$11,000,000 - $550,000 = $10,450,000
Transaction TOTAL - $10,450,000
Annual Operating Cost (excluding operators) - $100,000 in 10 years
Maintenance Cost - $500,000 in 10 years
Wages and Benefits - $500,000 in 10 years
Major Overhaul - $400,000 in 5 years
Disposal Value - $500,000 in 10 years
Post Transaction TOTAL - $4,400,000

**Depreciation of capital assets over 5 years** - $2,090,000 each year (up to 5 years)
Year 1 - $10,450,000
Year 2 - $8,360,000
Year 3 - $6,270,000
Year 4 - $4,180,000
Year 5 - $2,090,000

GRAND TOTAL - $15,520,000 in 10 years

Buy Analysis
Supplier – GargantuLift 6000 by Digger Construction

Pre-Transaction TOTAL - $0

Purchase Cost - $15,000,000 in 10 years
Transaction TOTAL - $15,000,000 in 10 years

Wages and Benefits (operators) - $2,000,000 in 10 years (provided by Happyland)
Post Transaction TOTAL - $2,000,000
GRAND TOTAL - $17,000,000 in 10 years

**Digger will be responsible for all maintenance, operating and decommissioning at the end of 10 years**
Comparisons
Make
Buy
Total Cost to produce
$15,520,000 in 10 years
$1,552,000 – yearly
Total Cost to buy or subcontract $17,000,000 in 10 years
$1,700,000 - yearly
Figures include – purchase price, travel related