Door2DoorCo are a large courier company who have just received a shipment of X new vans. They wish to lock in a tyre supply contract to keep these vans well shod over the Y months that they intend to keep the vans. The vans come with low quality tyres that will need to be replaced in 2 months. Two suppliers, ThriftyTread and WiserWheels have expressed interest at supplying tyres at a fixed price for the duration. The offers are summarised below:
Number of Vans, X – 120
Corporate Discount rate – J1=12.68% p.a.
Initial Tyre Life – 2 months
Keep vans for (Y) – 50 months
ThriftyTread Tyre price – $100.00 Tyre life – Four months Tyre replaced at – 2, 6, 10, …, 46, 50 months
WiserWheels Tyre price – $148.00 Tyre life – Six months Tyres replaced at – 2, 8, 14, …, 44, 50 months
a) For each of the two potential suppliers, illustrate Door2DoorCO’s tyre expenditure for the new vans as a fully labelled timeline diagram. (Remember that there are X new vans, and assume each van has 4 tyres.)
b) Determine the value in period 2 dollars of the expenditure stream if Door2DoorCo decide to go with ThriftyTreads. [Hint, you will firstly need to find the j3 rate equivalent to the corporate discount rate, you will then need to find the PV of the expenditure stream in period 2 dollars]
c) Thus determine the present value of the expenditure stream if Door2DoorCo decide to go with ThriftyTreads. [NB this is a bit tricky and is aimed at stronger students]
d) Determine the value in period 2 dollars of the expenditure stream if Door2DoorCo decide to go with WiserWheels.
e) Thus determine the present value of the expenditure stream if Door2DoorCo decide to go with WiserWheels [NB this is a bit tricky and is aimed at stronger students]
f) Comparing your answers for part (b) with part (d), OR part (c) with part (e), explain which tyre supplier Door2DoorCo should choose.
g) Suggest three legitimate business considerations which a manager may take into account that might influence or even change the recommendation from part (f). NB “These tyres are prettier”, “This company will bribe me with a kickback”, or “My wife works for that company” are NOT legitimate business reasons. (Write around 20~30 words explaining/justifying each consideration.)