Tco-Happyland Construction Essay

1151 Words May 28th, 2013 5 Pages
Module 2
Session 5
Make or Buy: TCO Analysis
Happyland Construction Inc. Case
Instructor: Nikki Raycraft
By: Choaa Awad

OIPMAC ID#:10041436

Executive Summary:
Happyland Construction is expanding and growing its operations. There is a need to make a huge capital investment in purchasing a crane necessary for its operations in the next ten years.
GargantuLift 6000 crane model produced by Mega Corporation is recommended by engineering, maintenance, finance, purchasing, and management staff.
Top management needs to decide which is more financially sound: to buy the crane or subcontract (lease) it from Digger Construction.
According to the figures presented by the chief purchasing officer based on the research done by one of his
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Quantitative Analysis:
Betty, a purchasing section staff, prepared a list of all the costs involved in buying or leasing the crane lift.
TCO associated with buying are:
-The purchase price of $11,000,000
-Travel related costs involved in assessing the different crane models and initial training for the crane operators: $170,000
-Annual maintenance costs of $50,000 for 10 year period
-Annual operating costs not including the operators' salaries&benefits: $100,000
-Operators' salaries and benefits per year: $200,000
-Major over haul in 5 years: $400,000
-Residual crane value after 10 years: $500,000
Total costs over 10 years for the above items: $14,570,000
After a 5% discount rate for the future value of money: $15,298,500
Total costs of ownership in subcontracting the crane lift were itemized as follows:
-$1,500,000 annual lease charges for a 10 year period.
-$200,000 annual salaries and benefits for crane operators over a 10 year period
Total costs for subcontracting the crane lift over 10 years: $17,000,000

Alternatives:
1-Subcontract the crane.Happyland management could decide to lease the crane from Digger Construction over the 10 years period.
Pros: Fixed installments known a head of time for the 10 years span regardless of the fluctuations in the financial institutions

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