Calculate the NPV for each option

Oppenheim Zimmer sells sofas, armchairs and other furniture items from its premises in a retail park. Customers often ask for home delivery to be arranged, and the company has contracted out the service to a series of small delivery firms. The delivery services are of inconsistent quality; customers often ring Oppenheim’s to complain that the delivery was late, or that the goods were damaged in transit. Oppenheim’s directors have decided that the delivery problem must be properly addressed because the company is losing sales and acquiring a reputation for unreliability. The company’s finance director has examined three options:

● Option 1. Buy three new delivery vehicles and employ full-time drivers. The initial outlay for the vehicles would be €76 000, and the annual incremental costs of employment, fuel and other motor expenses would be €82 000. At the end of their five-year useful life the vehicles could be sold for €9000 in total. ● Option 2. Contract the service out to a single, high quality provider who would take on full responsibility for van purchase, maintenance and other costs, including the employment of drivers. Quotations for the service have been obtained; a good quality service can be purchased under a five-year contract for €105 000 per year. ● Option 3. Lease the three vehicles required for the service at a cost of €10 000 per year per vehicle for a term of five years. Fuel and other running costs, and the costs of employing three drivers, would be incurred direct under this option at a total cost of €77 000 per year. The finance director estimates that an improved service would boost sales. Incremental sales of €113 000 per year would be made under all three options. Oppenheim’s cost of capital is 12%.

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i) Calculate the NPV for each option.

ii) Advise the directors on the most appropriate course of action, taking into account any other relevant factors.

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