LIQUID CHEMICAL CO.

Liquid Chemical Co.

Amber Emelander
DeVry University

LIQUID CHEMICAL CO.

2
Liquid Chemical Co.

Assume that I am the general manager, Mr. Walsh of Liquid Chemical Co. This company
manufactures and sells a range of high-grade products. Some of these products require packaging
with a special material called GHL. Aside from manufacturing and selling, we also operate a
department that maintains and repairs our packing containers. This department keeps the
packaging in its best conditions, as well as builds new packages to replace units that have been
damage beyond repair. I suspect that we may save money by outsourcing some of our business.
After careful consideration I have found a firm that specializes in container production,
Packages, Inc. I have to decide what the best course of action would be for my company. I have
four choices:
Choice A: The status quo. Liquid Chemical Co. can continue to make containers and perform
maintenance.
Choice B: Liquid Chemical Co. will continue to make containers, but will outsource
maintenance to Packages, Inc.
Choice C: Liquid Chemical Co. will buy containers from Packages, Inc., but will perform the
maintenance.
Choice D: Liquid Chemical Co. will completely outsource. Packages, Inc. will make the
containers and provide the necessary maintenance.
Below are my calculations regarding the four choices:

LIQUID CHEMICAL CO.

Choice A: Continue to make containers and perform maintenance.

Year of
Operation
Buy GHL
Tax savings on
purchase
Cash flow on
purchase
Other materials
Labor: Supervisor
Labor: Workers
Rent: Warehouse
Maintenance
Other expanses
Managers Salary

5
(240,000
96,000
(144,000)

(500,000)
(50,000)
(450,000)
(85,000)
(36,000)
(157,500)
(80,000)

(500,000)
(50,000)
(450,000)
(85,000)
(36,000)
(157,500)
(80,000)

(500,000)
(50,000)
(450,000)
(85,000)
(36,000)
(157,500)
(80,000)

(500,000)
(50,000)
(450,000)
(85,000)
(36,000)
(157,500)
(80,000)

(500,000)
(50,000)
(450,000)
(85,000)
(36,000)
(157,500)
(80,000)

Total Costs
(1,358,500) (1,358,500) (1,358,500) (1,358,500) (1,358,500)
Tax Savings
543,400
543,400
543,400
543,400
543,400
Cash flow due to
(815,100)
(815,100)
(815,100)
(815,100)
(815,100)
costs
Tax effects of
60,000
60,000
60,000
60,000
depreciation
Tax effect of GHL
80,000
80,000
80,000
80,000
costs
Total cash flow
(675,100)
(675,100)
(675,100)
(675,100)
(959,100)
Discount rate
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
factor: 10%
Present Value
(613,727)
(557,213)
(507,213)
(461,102)
(595,526)
NPV
$(2,735,502)

Choice B: Continue to make packages, outsource maintenance.

Year of
Operation
Buy GHL
Tax savings on
purchase
Cash flow on
purchase
Other materials
Labor: Supervisor
Labor: Workers
Rent: Warehouse

5
(120,000)
48,000
(72,000)

(450,000)
(50,000)
(360,000)
(85,000)

(450,000)
(50,000)
(360,000)
(85,000)

(450,000)
(50,000)
(360,000)
(85,000)

(450,000)
(50,000)
(360,000)
(85,000)

(450,000)
(50,000)
(360,000)
(85,000)

LIQUID CHEMICAL CO.

Maintenance
(36,000)
(36,000)
(36,000)
(36,000)
(36,000)
Other expanses
(92,500)
(92,500)
(92,500)
(92,500)
(92,500)
Managers Salary
(80,000)
(80,000)
(80,000)
(80,000)
(80,000)
Maintenance
(375,000)
(375,000)
(375,000)
(375,000)
(375,000)
contract
Total Costs
(1,528,500) (1,528,500) (1,528,500) (1,528,500) (1,528,500)
Tax Savings
611,400
611,400
611,400
611,400
611,400
Cash flow due to
(917,100)
(917,100)
(917,100)
(917,100)
(917,100)
costs
Tax effects of
60,000
60,000
60,000
60,000
depreciation
Tax effect of GHL
72,000
72,000
72,000
72,000
32,000
costs
Total cash flow
(785,100)
(785,100) (785,100)
(785,100)
(957,100)
Discount rate
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
factor: 10%
Present Value
(713,727)
(648,843)
(589,857)
(536,234)
(594,284)
NPV
$(3,082,945)

Choice C: Buy containers, continue to perform maintenance.

Year of
0
Operation
Sell machinery 200,000
Tax saving on
160,000
sale
Cash flow on
360,000
sale
Sell GHL
560,000
Tax savings on
56,000
sale
Cash flow on
616,000
sale
Other materials
Labor:
Supervisor
Labor: Workers
Rent:
Warehouse
Severance pay (16,000)
Other expanses
Managers Salary

(50,000)
(50,000)

(50,000)
(50,000)

(50,000)
(50,000)

(50,000)
(50,000)

(50,000)
(50,000)

(90,000)
(85,000)

(90,000)
(85,000)

(90,000)
(85,000)

(90,000)
(85,000)

(90,000)
(85,000)

(65,000)
-

(65,000)
-

(65,000)
-

(65,000)
-

(65,000)
-

LIQUID CHEMICAL CO.

Container
(1,250,000) (1,250,000) (1,250,000) (1,250,000) (1,250,000)
contract
Total Costs
(16,000) (1,590,000) (1,590,000) (1,590,000) (1,590,000) (1,590,000)
Tax Savings
6,400
636,000
636,000
636,000
636,000
636,000
Cash flow due to (9,600)
(954,000)
(954,000)
(954,000)
(954,000)
(954,000)
costs
Tax effects of
depreciation
Tax effect of
8,000
8,000
8,000
8,000
8,000
GHL costs
Total cash flow 966,400
(946,000)
(946,000)
(946,000)
(946,000)
(946,000)
Discount rate
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
factor 10%
Present Value
966,400
(860,000)
(781,818)
(710,744)
(646,131)
(587,392)
NPV
$(2,619,684)

Choice D: Outsource packaging and maintenance.

Year of
Operation
Sell machinery
Tax savings on
sale
Cash flow on
sale
Sell GHL
Tax savings on
sale
Cash flow on
sale
Other materials
Labor:
Supervisor
Labor:
Workers
Rent:
Warehouse
Severance pay
Pension
Other expenses
Managers
Salary
Container
Contract

200,000
160,000
360,000
640,000
64,000
704,000

(20,000)

(30,000)
-

(30,000)
-

(30,000)
-

(30,000)
-

(30,000)
-

(1,250,000) (1,250,000) (1,250,000) (1,250,000) (1,250,000)

LIQUID CHEMICAL CO.

Maintenance
(375,000)
(375,000)
(375,000)
(375,000)
(375,000)
contract
Total costs
(20,000) (1,655,000) (1,655,000) (1,655,000) (1,655,000) (1,655,000)
Tax Savings
8,000
622,000
622,000
622,000
622,000
622,000
Cash flow due
(12,000) (9330,000) (9330,000) (9330,000) (9330,000) (9330,000)
to costs
Tax effects of
depreciation
Tax effect of
GHL costs
Total cash flow 1,052,000
(933,000)
(933,000)
(933,000)
(933,000)
(933,000)
Discount rate
1.0000
0.9091
0.8264
0.7513
0.6830
0.6209
factor: 10%
Present Value 1,052,000
(902,727)
(820,661)
(746,056)
(678,232)
(616,575)
NPV
$(2,712,251)

According to my calculations above the net present value of my four options are as
follows: Choice A: $(2,735,502), Choice B: $(3,082,945), Choice C: $(2,619,684), Choice D:
$(2,712,251). My conclusion as manager is that Liquid Chemical Co. should go with Choice C
because the net present value of Choice C is the lowest of the four options. With Choice C
Liquid Chemical Co. will buy containers from Packages, Inc, but continue to perform the
maintenance on the containers.

LIQUID CHEMICAL CO.

7
References

Anderson, S. W., Lanen, W. N., & Maher, M. W. (2011).Fundamentals of cost accounting. (3

ed.). New York, NY: McGraw-Hill Companies.