W.6_Lilly Wasitova_Value of Resources


Problem Statement

 With the problem posted earlier in my Blog#5, the decision on ‘make or buy’ of the additional head count requirement is to be assessed and compared from the commercial point of view. The requirement on additional resources is as below:


 Alternative Solutions

 Taking the resource specific attributes for each product port folio requirement from previous blog with the assumption that the quantitative (time and cost) factor to acquire the resources is already known and using the Chapter 6 from [1], the Present Worth (PW), Annual Worth (AW) and Future Worth (FW) of the program is to be calculated, in order to see the economic comparison of the two alternatives ‘make or buy”.

 

Selection Criteria

The input to frame the analysis period is using Reference [4] p.214 “three or more years of formal education beyond high school should be required to produce a competent practitioner” for Engineers. The program will be plotted for 3 (three) years in the period from 2007 to 2010.

In order to proceed with the calculation the following assumptions are made:

  • The ‘make’ Period T(make) is calculated only for 30 months, since the crash program is designed for 6 months, where candidates will be assign as On The Job Trainee and will be recruited after passing On The Job Training.
  • The ‘buy’ Period T(make) is calculated with additional 3 months for probation period and the learning curve for new comer.
  • The fresh graduate salary data is obtained from [5] for the year 2009, then scaled down to year 2007 considering 10% of COLA per year (Cost of Living Adjustment) and is considered as Salary Present Worth (PW)2007, make
  • The salary for experienced Engineers or (PW)2007, buy is based on the fresh graduates salary data with additional 10% of COLA per year and additional 15% performance increase and/or step up increase. Step-up mean that candidate with some experience usually willing to move to other company if their experience is compensated with adequate salary increase.

The following table summarizes the requirements, assumptions and data:

Product Characteristics

3rd Month

5th Month

T(make) [months]

T(buy) [months]

Entry Salary Fresh Graduate/month [SGD]

Entry Salary based on Experience/month [SGD]

Product A

10

10

30

39

2,900

3,625

Product B

10

15

30

39

2,900

4,531

Product C

0

6

30

39

2,900

4,531

Product D

0

10

30

39

2,900

3,625

Product E

5

0

30

39

2,900

4,531

Product F

10

10

30

39

2,900

2,900

TOTAL

35

51

Table 3 : Time and Salary Range for Each Product Port Folio

Selection of the preferred alternatives

In order to see the salary Future Worth in 3 (three) year’s time, by end of 2010, the calculation following the Equivalent Worth Method and below formulas from [1]:

PW (i %) = F0 ( 1 + i )0 + F1 ( 1 + i )-1 + ….. + FN ( 1 + i )-N

 AW (i %) = RE – CR (i%)

FW (i %) = F0 ( 1 + i )N + F1 ( 1 + i )N-1 + ….. + FN ( 1 + i )0

Where,

i = effective interest rate

k = index for each compounding period ( 0 ≤ k ≤ N )

Fk = future cash flow at the end of period k

N = number of compounding period in the planning horizon

    R = Annual Equivalent Revenue or Savings

    E = Annual Equivalent Expenses

    CR = Annual Capital Recovery

Analysis and Comparison of Alternatives

With : i = MARR (Minimum Attractive Rate of Return) and constant over the period of 3 9three) year, and is 5% per year and COLA of 10% per year, the result is compiled in the below table

Product Characteristics

Make [SGD]

PW(Make) [SGD]

AW(Make) [SGD]

FW(Make) [SGD]

Buy [SGD]

PW(Buy) [SGD]

AW(Buy) [SGD]

FW(Buy) [SGD]

EOY 0

EOY 1

EOY 2

EOY 0

EOY 1

EOY 2

Product A

638,000

701,800

771,980

1,919,718

(704,937)

2,222,314

797,500

877,250

964,975

2,399,647

(881,171)

2,777,892

Product B

783,000

861,300

947,430

2,356,017

(865,150)

2,727,385

1,223,438

1,345,781

1,480,359

3,681,277

(1,351,797)

4,261,539

Product C

174,000

191,400

210,540

523,559

(192,256)

606,086

271,860

299,046

328,951

818,016

(300,383)

946,956

Product D

290,000

319,000

350,900

872,599

(320,426)

1,010,143

362,500

398,750

438,625

1,090,749

(400,532)

1,262,678

Product E

174,000

191,400

210,540

523,559

(192,256)

606,086

271,860

299,046

328,951

818,016

(300,383)

946,956

Product F

638,000

701,800

771,980

1,919,718

(704,937)

2,222,314

638,000

701,800

771,980

1,919,718

(704,937)

2,222,314

Table 4 : Calculated Present Worth, Annual Worth and Future Worth for each Product Port Folio and ‘Make or Buy’ Alternatives

Selection of the preferred alternatives

From the above calculation, the accumulative values for all resource requirement is as below:

PW(Make), accumulative [SGD]

AW(Make), accumulative [SGD]

FW(Make), accumulative [SGD]

PW(Buy), accumulative [SGD]

AW(Buy), accumulative [SGD]

FW(Buy), accumulative [SGD]

8,115,171

(2,979,960)

9,394,325

10,727,425

(3,939,202)

12,418,335

Table 5 :Accumulative Present Worth, annual Worth and Future Worth for ‘Make’ and ‘Buy’

From the calculation, actually the Annual Worth (AW) is showing negative value, that in theory will say that the program is economically not justified. However, this calculation result may come for there is no investment considered.

The values for both Present Worth (PW) and Future Worth (FW) is ≥ 0 and according to [1] it is economically justified. From the table above, the proportions af PW and FW are the same for both ‘Make’ and ‘Buy’.

Performance Monitoring & Post Evaluation of Results

Based on the calculation made, still ‘Make’ is the better solution, since overall the Annual Worth is giving less negative value, considering that all assumptions are the same for ‘make’ and ‘buy’.

References:

  1. Sullivan, William G., Wicks, Elin M. & Koelling, C. Patrick (1942), Engineering Economy 15th Edition, Singapore: Prentice Hall, Inc.
  2. Michael Bassard & Diane Riter (2010), The Memory Jogger 2nd Edition, Canada, GOAL/QPC
  3. John K. Hollmann, PE CCE (2006), Total Cost Management Framework, A Process for Applying the Skills and Knowledge of Cost Engineering 1st Edition, USA, AACE International – The Association for the Advancement of Cost Engineering
  4. Paul D. Giammalvo CDT, PMP, CCE, MScPM, PhD (2007), Thesis, Is project management a profession? If yes, where does it fit in and if not, what is it?
  5. Graduate Employment Survey, retrieved from http://www.transitioning.org/2010/04/07/graduate-employment-survey-2009-published-2010-salary-sg
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About Lilly Wasitova

Goal oriented professional who like to have fun
This entry was posted in Lilly Wasitova, Week #6. Bookmark the permalink.

One Response to W.6_Lilly Wasitova_Value of Resources

  1. DrPDG says:

    Well, you really did an excellent job of setting up the problem, Bu Lilly!!! And I will be happy to give you credit, PROVIDED that in the next blog posting, you identify, explain and fix the underlying reason that you ended up with a negative NPV. Shouldn’t a negative NVP tell us something is MISSING from this equation….?? What do you think it is?

    WHY do you think you ended up with a NEGATIVE NPV? Root cause analysis?

    HINT: Does what a person is PAID have little or no relevance to WHAT? Asked another way, what REALLY IMPORTANT number could you measure that WILL (or at least SHOULD) generate a positive NPV. More hints- http://www.investopedia.com/university/ratios/operating-performance/ratio2.asp or http://www.massmac.org/newsline/0707/McKinsey.pdf

    Bottom line- RIGHT tool/technique, WRONG input data….. GIGO…. Garbage In, Garbage Out….

    I leave you with my favorite quote from Albert Einstein…. “http://www.brainyquote.com/quotes/quotes/a/alberteins100201.html”

    BR,
    Dr. PDG, Lagos, Nigeria

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