160 every six months per register B u s i n e s s F i n a n c e

1) A buyer for a frozen yogurt franchise with 145 stores is responsible for all the asset purchases at her company. She has decided to upgrade the equipment of her outlets by installing new cash registers. She believes that if she purchases these latest cash registers, they will last for the next eight years. She is considering a quote from a supplier who agreed to supply the cash registers for $1,050 per register. The buyer wants to order one register for each store (145 registers). Along with the registers, she also decided to buy two add-ons for each register—a credit card machine and an automatic coin dispenser. The two accessories would cost her an additional $120 and $185 per register. As with any purchase of new equipment, support would be required to maintain the equipment. The buyer decided to purchase an eight-year warranty, which would cost $200 per register. She also estimated that she will need to spend money to link the registers to the computer system, which would cost $110 per quarter per register and an additional $160 every six months per register for maintenance. The buyer will need to pay a one-time upfront training charge of $100 per register to train the outlet managers. She also considered the cost of downtime every year (when the registers are not working and another form of cashing people out must be used). She estimated the downtime to be 12 hours per register per year, and the cost to be $55 per hour. She was confident that the high-end registers would have a salvage value of $120 per register at the end of their life. As she was calculating the cost, she suddenly realized that there were other costs related to the purchase. The cost to install the registers was $380 per register. She calculated that finalizing the sourcing contract for the registers, security service, and other costs would take the work of 2 full-time equivalent people working in the purchasing department exactly 30 days of each person’s time. She thought that she would need the help of a sourcing manager who makes a total salary of $160,000 per year and an assistant who earns $105,000 per year. They would place an initial purchase order, which would cost the company $275 and each year they would submit 6 invoices at an estimate of $53 each for the register service costs.

a) Using the data provided above, calculate the NPV of the TCO for the buyer’s decision using a 10 percent discount rate.

b) Where should the buyer focus her efforts to reduce the TCO?

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