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Increased manufacturing and operating costs of spreader production at the Temecula plant have
influenced the decision to consider relocating production to China to increase profit margin. After
thoroughly analyzing the present and future logistical and financial risks of both the Temecula and
China plants, the team determined that Scotts Miracle-Gro should maintain spreader operations at the
Temecula plant. The following quantitative and qualitative analyses support the teams conclusion.
the number of workers remaining the same in both operations, it is evident that the cheaper labor rates
(18 times less than Temecula) in China are a significant advantage.
There are inherent risks and uncertainties in some of the factors that financially impact the
decision to outsource to China. Changes in Transportation and Labor costs can affect the total landed
costs of the product. Figure 4 and Figure 5 illustrates that an increase in transportation costs from 3% to
9.4% per year, shifts the financial drivers to favor Temecula over China. A detailed transportation cost
sensitivity analysis is graphically illustrated in Figure 6.
Temecula plant needs to increase by 16.2% annually as shown in Figure 7 and Figure 8 and hourly labor
cost in China requires an unprecedented increase of 39.5% annually to financially prefer Temecula over
China (Figure 9 and Figure 10). Transportation costs had the most significant impact on maintaining
operations at the Temecula facility. Freight charges accounted for over $90 million in additional
charges by outsourcing production to China. This expense is almost double the benefit of labor costs
and thus plays an instrumental part in maintaining production in the Temecula facility.
inventory, associated holding costs, and risk. Given larger lot sizes, the potential for poor quality
production tremendously increases costs from replacement orders coupled with long lead time, rework,
and finally customer dissatisfaction in the form of missed sales. Supplier viability depends on
sustainability in the form of quality and reliability, thus an accepted level of quality deterioration for
cost savings tradeoff may eventually inhibit the suppliers sustainability.
The most visible tradeoff with the China option is decreased manufacturing and labor costs
versus increased inbound transportation costs at Temecula. However, the lack of information
coordination capabilities expressed by Chinese manufacturers accentuates freight costs associated with
lack of visibility and the bullwhip effect, which minimizes the optimism outlook. Lastly, if the Chinese
government allows the Yuan to float or begins charging taxes and duties on agricultural products, costs
in China would soar. Heavy financial hedging would protect Scott from general fluctuations but would
not be a sufficient strategy to evade the inevitable.
China Analysis
Total Cost
$19,466,742 $12,340,613 $12,624,736 $12,919,439 $13,225,061 $13,941,953 $13,870,484 $14,211,035 $14,564,005 $14,929,806 $15,708,870 $157,802,744
15% Discount Rate
1.0000
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
0.2472
NPV
$19,466,742 $10,730,967 $9,546,115 $8,494,741 $7,561,471 $6,931,615 $5,996,593 $5,342,454 $4,760,999 $4,243,983 $3,882,992 $86,958,673
Total NPV
$86,958,673
Management
$18,815,401
$4,515,696
($14,299,705)
Overhead
Freight Safety Stock
$34,434,425 $12,807,796
$0
$14,387,997 $102,462,366 $5,060,000
($20,046,428) $89,654,570 $5,060,000
Investment
$5,500,000
$17,893,054
$12,393,054
Difference*
($96,210,439)
$60,368,437
$12,393,054
($23,448,948)
4
10
PRODUCTION COSTS
Raw Materials
Current savings from use of regrind
($100,000)
($100,000)
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
($105,000)
($110,250)
($115,763)
($121,551)
($127,628)
($134,010)
($140,710)
($147,746)
($155,133)
($162,889)
Only hourly w age employees counted (i.e. direct labor personal and temporary w orkers)
$16.25
$16.25
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$16.74
$17.24
$17.76
$18.29
$18.84
$19.40
$19.99
$20.59
$21.20
$21.84
6%
6%
6%
6%
3%
3%
3%
3%
3%
195
6%
195
183
$6,337,500
$6,135,968
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
172
162
152
143
139
135
131
$5,940,844
$5,751,925
$5,569,014
$5,391,919
$5,387,066
$5,382,218
127
123
$5,377,374
$5,372,534
$5,367,699
$0.2368
Avg. Kw H rate
$0.1600
Surcharge (per Kw H)
Annual pow er usage (Kw H)
Total annual electricity cost
$0.1800
$0.1872
$0.1947
$0.2025
$0.2105
$0.2190
$0.2277
$0.025
$0.025
$0.025
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
8,000,000
7,840,000
$1,500,576
7,683,200
$1,521,704
7,529,536
$1,355,153
7,378,945
$1,381,172
7,231,366
$1,407,690
7,086,739
$1,434,718
6,945,004
$1,462,264
6,806,104
$1,490,340
6,669,982
$1,518,954
6,536,582
$1,548,118
$1,480,000
Lease
TOTAL PRODUCTION COSTS
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$10,717,500
$10,531,544
$10,352,298
$9,991,315
$9,828,635
$9,671,981
$9,687,774
$9,703,772
$9,719,968
$9,736,356
$9,752,928
SG&A COSTS
Management Costs
Current Average annual rate
$125,000
Annual increase %
Avg. annual pay labor rate
Current no. of w orkers
0%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$125,000
$128,750
$132,613
$136,591
$140,689
$144,909
$149,257
$153,734
$158,346
$163,097
$167,990
6%
6%
6%
6%
3%
3%
3%
3%
3%
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
14
13
12
12
11
10
10
$1,495,257
$1,447,707
16
6%
16
15
$2,000,000
$1,936,400
$1,874,822
$1,815,203
$1,757,480
$1,701,592
$1,647,481
$1,595,091
$1,544,367
Overhead Costs
Corporate Allocation
30% allocation of direct costs
CM Profit
Total annual OH costs
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$2,345,250
$2,290,963
$2,238,764
$2,132,123
$2,085,056
$2,039,883
$2,046,535
$2,053,345
$2,060,314
$2,067,447
$2,074,745
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,345,250
$3,290,963
$3,238,764
$3,132,123
$3,085,056
$3,039,883
$3,046,535
$3,053,345
$3,060,314
$3,067,447
$3,074,745
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
0.03
$1,000,000
$1,030,000
$1,060,900
$1,092,727
$1,125,509
$1,159,274
$1,194,052
$1,229,874
$1,266,770
$1,304,773
$1,343,916
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,345,250
$6,257,363
$6,174,487
$6,040,053
$5,968,044
$5,900,749
$5,888,069
$5,878,310
$5,871,452
$5,867,476
$5,866,369
$500,000
INVESTMENTS
Annual Capital Outlays
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Molds
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$16,531,368
$16,296,679
$16,072,730
$16,075,843
$16,082,082
$16,091,420
$16,103,832
$16,119,297
Start Up Costs
TOTAL INVESTMENTS
Total Costs
Discout Factor @ 15%
NPV
$17,562,750
1.0
$17,562,750
$17,288,907
0.8696
$15,033,832
$17,026,784
0.7561
$12,874,695
0.6575
$10,869,643
0.5718
$9,317,679
0.4972
$7,990,987
0.4323
$6,950,031
0.3759
$6,045,850
0.3269
$5,260,314
0.2843
$4,577,714
10 YR NPV
0.2472
$3,984,444
$100,467,939
10
PRODUCTION COSTS
Raw Materials
Current savings from use of regrind
$0
$0
Electricity Costs
Avg. KwH rate
Surcharge (per KwH)
Annual power usage (KwH)
Total annual electricity cost
5%
$0
5%
$0
5%
$0
5%
$0
5%
$0
5%
$0
5%
$0
2%
$1.05
2%
$1.07
2%
$1.09
2%
$1.11
2%
2%
2%
2%
169
$353,907
166
$353,766
163
$353,624
159
$353,483
$0.0717
$0.000
8,000,000
$573,300
$0.0752
$0.000
8,000,000
$601,965
$0.0790
$0.000
8,000,000
$632,063
$0.0830
$0.000
8,000,000
$663,666
$0.0871
$0.000
8,000,000
$696,850
$0.0915
$0.000
8,000,000
$731,692
$0.0960
$0.000
8,000,000
$768,277
$0.1008
$0.000
8,000,000
$806,691
$0.1059
$0.000
8,000,000
$847,025
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$1,074,900
$1,100,758
$1,127,916
$1,156,439
$1,186,396
$1,217,857
$1,250,899
$1,285,600
$1,322,043
$1,360,315
$1,400,508
3%
$30,900
3%
$31,827
3%
$32,782
3%
$33,765
3%
$34,778
3%
$35,822
3%
$36,896
3%
$38,003
3%
$39,143
3%
$40,317
6%
6%
6%
6%
3%
3%
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
14
13
12
12
11
10
$449,957
$435,649
$421,795
$408,382
$395,395
$382,822
3%
3%
3%
10
$370,648
9
$358,862
9
$347,450
0%
$30,000
16
6%
Overhead Costs
Corporate Allocation
50% allocation of direct costs
CM Profit 8%
Total annual OH costs
16
$480,000
15
$464,736
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$177,450
$177,379
$177,308
$177,237
$177,166
$177,095
$177,025
$176,954
$176,883
$176,812
$176,741
$124,392
$1,301,842
$125,240
$1,302,619
$126,230
$1,303,538
$127,367
$1,304,604
$128,655
$1,305,822
$130,099
$1,307,195
$131,704
$1,308,728
$133,474
$1,310,427
$135,415
$1,312,298
$137,534
$1,314,346
$139,837
$1,316,578
$8,000,000
$460,000
0.03
$8,240,000
$460,000
$8,487,200
$460,000
$8,741,816
$460,000
$9,004,070
$460,000
$9,274,193
$460,000
$9,552,418
$460,000
$9,838,991
$460,000
$10,134,161
$460,000
$10,438,185
$460,000
$10,751,331
$460,000
$10,241,842
$10,467,355
$10,700,695
$10,942,069
$11,191,687
$11,449,769
$11,716,542
$11,992,240
$12,277,107
$12,571,393
$12,875,359
$300,000
$1,000,000
$250,000
$200,000
$400,000
$6,000,000
$300,000
$0
$262,500
$210,000
$0
$300,000
$0
$275,625
$220,500
$0
$300,000
$0
$289,406
$231,525
$0
$300,000
$0
$303,877
$243,101
$0
$300,000
$0
$319,070
$255,256
$400,000
$300,000
$0
$335,024
$268,019
$0
$300,000
$0
$351,775
$281,420
$0
$300,000
$0
$369,364
$295,491
$0
$300,000
$0
$387,832
$310,266
$0
$300,000
$0
$407,224
$325,779
$400,000
$8,150,000
$772,500
$796,125
$820,931
$846,978
$1,274,327
$903,043
$933,195
$964,855
$998,098
$1,433,003
$19,466,742
$12,340,613
$12,624,736
$12,919,439
$13,225,061
$13,941,953
$13,870,484
$14,211,035
$14,564,005
$14,929,806
$15,708,870
1.00
$19,466,742
0.8696
$10,730,967
0.7561
$9,546,115
0.6575
$8,494,741
0.5718
$7,561,471
0.4972
$6,931,615
0.4323
$5,996,593
0.3759
$5,342,454
0.3269
$4,760,999
0.2843
$4,243,983
0.2472
$3,882,992
$86,958,673
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
INVESTMENTS
Annual Capital Outlays
Start Up Costs
Additional Scott People To Manage CM
Additional Scott Travel
Molds
Buyback Lease Option
5%
$0
$30,000
Total Costs
5%
$0
Only hourly wage employees counted (i.e. direct labor personal and temporary workers)
$0.91
0%
2%
2%
2%
2%
2%
2%
$0.91
$0.93
$0.95
$0.97
$0.99
$1.00
$1.02
195
2%
2%
2%
2%
2%
2%
(Productivity assumed to increase at 2% annually.)
195
191
187
184
180
176
173
$354,900
$354,758
$354,616
$354,474
$354,333
$354,191
$354,049
(Assuming a 5 day work week, 8 hours/day and a 50 week year)
5.00% <--annual growth rate
$0.0650
$0.0683
$0.000
$0.000
8,000,000
8,000,000
$520,000
$546,000
Lease
TOTAL INVESTMENTS
5%
$0
10 YR NPV
Figure 4 NPV Calculations for Temecula with Transportation Cost Annual Increase of 9.4%
Year:
10
PRODUCTION COSTS
Raw Materials
Current savings from use of regrind
($100,000)
($100,000)
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
($105,000)
($110,250)
($115,763)
($121,551)
($127,628)
($134,010)
($140,710)
($147,746)
($155,133)
($162,889)
Only hourly wage employees counted (i.e. direct labor personal and temporary workers)
$16.25
$16.25
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$16.74
$17.24
$17.76
$18.29
$18.84
$19.40
$19.99
$20.59
$21.20
$21.84
6%
6%
6%
6%
3%
3%
3%
3%
3%
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
172
162
152
143
139
135
131
127
123
$5,377,374
$5,372,534
$5,367,699
195
6%
195
183
$6,337,500
$6,135,968
$5,940,844
$5,751,925
$5,569,014
$5,391,919
$5,387,066
$5,382,218
$0.1600
$0.1800
$0.1872
$0.1947
$0.2025
$0.2105
$0.2190
$0.2277
$0.2368
$0.025
$0.025
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
7,840,000
$1,500,576
7,683,200
$1,521,704
7,529,536
$1,355,153
7,378,945
$1,381,172
7,231,366
$1,407,690
7,086,739
$1,434,718
6,945,004
$1,462,264
6,806,104
$1,490,340
6,669,982
$1,518,954
6,536,582
$1,548,118
$1,480,000
Lease
$0.1731
$0.025
8,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$10,717,500
$10,531,544
$10,352,298
$9,991,315
$9,828,635
$9,671,981
$9,687,774
$9,703,772
$9,719,968
$9,736,356
$9,752,928
SG&A COSTS
Management Costs
Current Average annual rate
$125,000
Annual increase %
Avg. annual pay labor rate
Current no. of workers
0%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$125,000
$128,750
$132,613
$136,591
$140,689
$144,909
$149,257
$153,734
$158,346
$163,097
$167,990
6%
6%
6%
6%
3%
3%
3%
3%
3%
16
6%
16
15
$2,000,000
$1,936,400
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
14
13
12
12
11
10
$1,874,822
$1,815,203
$1,757,480
$1,701,592
$1,647,481
$1,595,091
10
$1,544,367
$1,495,257
$1,447,707
Overhead Costs
Corporate Allocation
30% allocation of direct costs
CM Profit
Total annual OH costs
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$2,345,250
$2,290,963
$2,238,764
$2,132,123
$2,085,056
$2,039,883
$2,046,535
$2,053,345
$2,060,314
$2,067,447
$2,074,745
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,345,250
$3,290,963
$3,238,764
$3,132,123
$3,085,056
$3,039,883
$3,046,535
$3,053,345
$3,060,314
$3,067,447
$3,074,745
$1,000,000
$1,094,000
$1,196,836
$1,309,339
$1,432,416
$1,567,064
$1,714,368
$1,875,518
$2,051,817
$2,244,688
$2,455,688
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,345,250
$6,321,363
$6,310,423
$6,256,665
$6,274,952
$6,308,538
$6,408,384
$6,523,954
$6,656,498
$6,807,391
$6,978,141
$500,000
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
0.03
INVESTMENTS
Annual Capital Outlays
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Molds
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$17,562,750
$17,352,907
$17,162,720
$16,747,980
$16,603,586
$16,480,519
$16,596,158
$16,727,726
$16,876,466
$17,043,746
$17,231,069
1.0
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
Start Up Costs
TOTAL INVESTMENTS
Total Costs
Discout Factor @ 15%
NPV
$17,562,750
$15,089,484
$12,977,482
$11,012,069
$9,493,154
$8,193,731
$7,174,977
$6,288,572
$5,516,947
$4,844,896
10 YR NPV
0.2472
$4,259,257
$102,413,319
Figure 5 NPV Calculations for China with Transportation Cost Annual Increase of 9.4%
Year:
10
PRODUCTION COSTS
Raw Materials
Current savings from use of regrind
$0
$0
Electricity Costs
Avg. KwH rate
Surcharge (per KwH)
Annual power usage (KwH)
Total annual electricity cost
5%
$0
5%
$0
5%
$0
$0.0717
$0.000
8,000,000
$573,300
$0.0752
$0.000
8,000,000
$601,965
$0.0790
$0.000
8,000,000
$632,063
$0.0830
$0.000
8,000,000
$663,666
$0.0871
$0.000
8,000,000
$696,850
5%
$0
5%
$0
5%
$0
5%
$0
2%
$1.05
2%
$1.07
2%
$1.09
2%
$1.11
2%
2%
2%
2%
169
$353,907
166
$353,766
163
$353,624
159
$353,483
$0.0915
$0.000
8,000,000
$731,692
$0.0960
$0.000
8,000,000
$768,277
$0.1008
$0.000
8,000,000
$806,691
$0.1059
$0.000
8,000,000
$847,025
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$1,074,900
$1,100,758
$1,127,916
$1,156,439
$1,186,396
$1,217,857
$1,250,899
$1,285,600
$1,322,043
$1,360,315
$1,400,508
3%
$30,900
3%
$31,827
3%
$32,782
3%
$33,765
3%
$34,778
3%
$35,822
3%
$36,896
3%
$38,003
3%
$39,143
3%
$40,317
6%
6%
6%
6%
3%
3%
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
14
13
12
12
11
10
$449,957
$435,649
$421,795
$408,382
$395,395
$382,822
3%
3%
3%
10
$370,648
9
$358,862
9
$347,450
0%
$30,000
16
6%
Overhead Costs
Corporate Allocation
50% allocation of direct costs
CM Profit 8%
Total annual OH costs
16
$480,000
15
$464,736
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$177,450
$177,379
$177,308
$177,237
$177,166
$177,095
$177,025
$176,954
$176,883
$176,812
$176,741
$124,392
$1,301,842
$125,240
$1,302,619
$126,230
$1,303,538
$127,367
$1,304,604
$128,655
$1,305,822
$130,099
$1,307,195
$131,704
$1,308,728
$133,474
$1,310,427
$135,415
$1,312,298
$137,534
$1,314,346
$139,837
$1,316,578
$8,000,000
0.03
$8,752,000
$9,574,688
$10,474,709
$11,459,331
$12,536,508
$13,714,940
$15,004,145
$16,414,534
$17,957,500
$19,645,505
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$10,241,842
$10,979,355
$11,788,183
$12,674,962
$13,646,948
$14,712,085
$15,879,064
$17,157,394
$18,557,481
$20,090,708
$21,769,533
$300,000
$1,000,000
$250,000
$200,000
$400,000
$6,000,000
$300,000
$0
$262,500
$210,000
$0
$300,000
$0
$275,625
$220,500
$0
$300,000
$0
$289,406
$231,525
$0
$300,000
$0
$303,877
$243,101
$0
$300,000
$0
$319,070
$255,256
$400,000
$300,000
$0
$335,024
$268,019
$0
$300,000
$0
$351,775
$281,420
$0
$300,000
$0
$369,364
$295,491
$0
$300,000
$0
$387,832
$310,266
$0
$300,000
$0
$407,224
$325,779
$400,000
$8,150,000
$772,500
$796,125
$820,931
$846,978
$1,274,327
$903,043
$933,195
$964,855
$998,098
$1,433,003
$19,466,742
$12,852,613
$13,712,224
$14,652,332
$15,680,321
$17,204,269
$18,033,006
$19,376,189
$20,844,378
$22,449,121
$24,603,044
1.00
$19,466,742
0.8696
$11,176,185
0.7561
$10,368,412
0.6575
$9,634,146
0.5718
$8,965,275
0.4972
$8,553,562
0.4323
$7,796,166
0.3759
$7,284,227
0.3269
$6,814,064
0.2843
$6,381,441
0.2472
$6,081,496
$102,521,717
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
INVESTMENTS
Annual Capital Outlays
Start Up Costs
Additional Scott People To Manage CM
Additional Scott Travel
Molds
Buyback Lease Option
5%
$0
$30,000
Total Costs
5%
$0
Only hourly wage employees counted (i.e. direct labor personal and temporary workers)
$0.91
0%
2%
2%
2%
2%
2%
2%
$0.91
$0.93
$0.95
$0.97
$0.99
$1.00
$1.02
195
2%
2%
2%
2%
2%
2%
(Productivity assumed to increase at 2% annually.)
195
191
187
184
180
176
173
$354,900
$354,758
$354,616
$354,474
$354,333
$354,191
$354,049
(Assuming a 5 day work week, 8 hours/day and a 50 week year)
5.00% <--annual growth rate
$0.0650
$0.0683
$0.000
$0.000
8,000,000
8,000,000
$520,000
$546,000
Lease
TOTAL INVESTMENTS
5%
$0
10 YR NPV
10 YR NPV
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
TEMECULA
98,782,957
98,958,251
99,142,553
99,336,371
99,540,239
99,754,719
99,980,407
100,217,927
100,467,939
100,731,137
101,008,253
101,300,058
101,607,360
101,931,015
102,271,918
102,631,014
103,009,296
103,407,805
103,827,640
104,269,952
104,735,951
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$140,000,000
CHINA
73,478,821
74,881,169
76,355,588
77,906,131
79,537,073
81,252,918
83,058,417
84,958,577
86,958,673
89,064,260
91,281,190
93,615,625
96,074,048
98,663,283
101,390,510
104,263,279
107,289,529
110,477,607
113,836,284
117,374,778
121,102,769
$120,000,000
$100,000,000
$80,000,000
10 YR NPV TEMECULA
10 YR NPV CHINA
$60,000,000
$40,000,000
$20,000,000
10 YR NPV
$-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
Freight Cost Change
Figure 7 NPV Calculations for Temecula with Productivity Annual Increase of 16.2%
Year:
10
PRODUCTION COSTS
Raw Materials
Current savings from use of regrind
($100,000)
($100,000)
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
($105,000)
($110,250)
($115,763)
($121,551)
($127,628)
($134,010)
($140,710)
($147,746)
($155,133)
($162,889)
Only hourly wage employees counted (i.e. direct labor personal and temporary workers)
$16.25
$16.25
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$16.74
$17.24
$17.76
$18.29
$18.84
$19.40
$19.99
$20.59
$21.20
$21.84
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
195
16.2%
195
163
$6,337,500
$5,470,150
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
137
115
96
81
68
57
47
$4,721,505
$4,075,320
$3,517,572
$3,036,157
$2,620,628
$2,261,969
40
33
$1,952,396
$1,685,191
$1,454,556
$0.2368
$0.1800
$0.1872
$0.1947
$0.2025
$0.2105
$0.2190
$0.2277
$0.025
$0.025
$0.025
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
8,000,000
7,683,200
$1,521,704
7,529,536
$1,355,153
7,378,945
$1,381,172
7,231,366
$1,407,690
7,086,739
$1,434,718
6,945,004
$1,462,264
6,806,104
$1,490,340
6,669,982
$1,518,954
6,536,582
$1,548,118
$1,480,000
7,840,000
$1,500,576
Lease
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$3,000,000
$10,717,500
$9,865,726
$9,132,959
$8,314,710
$7,777,193
$7,316,219
$6,921,336
$6,583,523
$6,294,990
$6,049,013
$5,839,785
$125,000
Annual increase %
Avg. annual pay labor rate
Current no. of workers
0%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$125,000
$128,750
$132,613
$136,591
$140,689
$144,909
$149,257
$153,734
$158,346
$163,097
$167,990
6%
6%
6%
6%
3%
3%
3%
3%
3%
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
14
13
12
12
11
10
10
$1,544,367
$1,495,257
$1,447,707
16
6%
16
15
$2,000,000
$1,936,400
$1,874,822
$1,815,203
$1,757,480
$1,701,592
$1,647,481
$1,595,091
Overhead Costs
Corporate Allocation
30% allocation of direct costs
CM Profit
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$2,345,250
$2,091,218
$1,872,963
$1,629,142
$1,469,623
$1,333,154
$1,216,604
$1,117,270
$1,032,821
$961,244
$900,802
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,345,250
$3,091,218
$2,872,963
$2,629,142
$2,469,623
$2,333,154
$2,216,604
$2,117,270
$2,032,821
$1,961,244
$1,900,802
$1,000,000
$1,030,000
$1,060,900
$1,092,727
$1,125,509
$1,159,274
$1,194,052
$1,229,874
$1,266,770
$1,304,773
$1,343,916
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,345,250
$6,057,618
$5,808,685
$5,537,072
$5,352,611
$5,194,020
$5,058,137
$4,942,235
$4,843,958
$4,761,273
$4,692,426
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Molds
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$17,562,750
$16,423,343
$15,441,644
$14,351,782
$13,629,804
$13,010,239
$12,479,474
$12,025,759
$11,638,948
$11,310,286
$11,032,211
1.0
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
0.03
INVESTMENTS
Annual Capital Outlays
Start Up Costs
TOTAL INVESTMENTS
Total Costs
Discout Factor @ 15%
NPV
$17,562,750
$14,281,168
$11,676,101
$9,436,530
$7,792,885
$6,468,388
$5,395,221
$4,520,928
$3,804,793
$3,215,089
10 YR NPV
0.2472
$2,726,994
$86,880,847
10
10 YR NPV
TEMECULA
CHINA
$ 110,721,881 $ 86,958,673
$ 108,601,919 $ 86,958,673
$ 106,590,968 $ 86,958,673
$ 104,683,104 $ 86,958,673
$ 102,872,716 $ 86,958,673
$ 101,154,487 $ 86,958,673
$ 99,523,383 $ 86,958,673
$ 97,974,636 $ 86,958,673
$ 96,503,733 $ 86,958,673
$ 95,106,404 $ 86,958,673
$ 93,778,607 $ 86,958,673
$ 92,516,520 $ 86,958,673
$ 91,316,530 $ 86,958,673
$ 90,175,219 $ 86,958,673
$ 89,089,357 $ 86,958,673
$ 88,055,891 $ 86,958,673
$ 87,071,938 $ 86,958,673
$ 86,134,774 $ 86,958,673
$ 85,241,827 $ 86,958,673
$ 84,390,667 $ 86,958,673
$ 83,579,002 $ 86,958,673
$120,000,000
$100,000,000
$80,000,000
10 YR NPV TEMECULA
10 YR NPV CHINA
$40,000,000
$20,000,000
10 YR NPV
$0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
Temecula Productivity Change
11
Figure 9 NPV Calculations for China with Hourly Labor Cost Annual Increase of 39.5%
Year:
10
PRODUCTION COSTS
Raw Materials
$0
$0
Electricity Costs
Avg. KwH rate
Surcharge (per KwH)
Annual power usage (KwH)
Total annual electricity cost
5%
$0
5%
$0
5%
$0
$0.0717
$0.000
8,000,000
$573,300
$0.0752
$0.000
8,000,000
$601,965
$0.0790
$0.000
8,000,000
$632,063
$0.0830
$0.000
8,000,000
$663,666
$0.0871
$0.000
8,000,000
$696,850
5%
$0
5%
$0
5%
$0
5%
$0
39.5%
$9.36
39.5%
$13.05
39.5%
$18.21
39.5%
$25.40
2%
2%
2%
2%
169
$3,167,437
166
$4,330,203
163
$5,919,821
159
$8,092,987
$0.0915
$0.000
8,000,000
$731,692
$0.0960
$0.000
8,000,000
$768,277
$0.1008
$0.000
8,000,000
$806,691
$0.1059
$0.000
8,000,000
$847,025
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$1,074,900
$1,231,184
$1,436,595
$1,708,755
$2,071,736
$2,558,423
$3,213,752
$4,099,129
$5,298,480
$6,926,511
$9,140,012
3%
$30,900
3%
$31,827
3%
$32,782
3%
$33,765
3%
$34,778
3%
$35,822
3%
$36,896
3%
$38,003
3%
$39,143
3%
$40,317
6%
6%
6%
6%
3%
3%
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
14
13
12
12
11
10
$449,957
$435,649
$421,795
$408,382
$395,395
$382,822
3%
3%
3%
10
$370,648
9
$358,862
9
$347,450
0%
$30,000
16
6%
Overhead Costs
Corporate Allocation
50% allocation of direct costs
CM Profit 8%
Total annual OH costs
16
$480,000
15
$464,736
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$177,450
$242,592
$331,647
$453,395
$619,836
$847,378
$1,158,451
$1,583,718
$2,165,102
$2,959,910
$4,046,493
$124,392
$1,301,842
$135,674
$1,378,265
$150,924
$1,482,572
$171,552
$1,624,947
$199,483
$1,819,319
$237,344
$2,084,723
$288,732
$2,447,183
$358,556
$2,942,275
$453,530
$3,618,632
$582,830
$4,542,740
$758,997
$5,805,490
$8,000,000
$460,000
0.03
$8,240,000
$460,000
$8,487,200
$460,000
$8,741,816
$460,000
$9,004,070
$460,000
$9,274,193
$460,000
$9,552,418
$460,000
$9,838,991
$460,000
$10,134,161
$460,000
$10,438,185
$460,000
$10,751,331
$460,000
$10,241,842
$10,543,001
$10,879,729
$11,262,412
$11,705,185
$12,227,298
$12,854,997
$13,624,087
$14,583,441
$15,799,787
$17,364,271
$300,000
$1,000,000
$250,000
$200,000
$400,000
$6,000,000
$300,000
$0
$262,500
$210,000
$0
$300,000
$0
$275,625
$220,500
$0
$300,000
$0
$289,406
$231,525
$0
$300,000
$0
$303,877
$243,101
$0
$300,000
$0
$319,070
$255,256
$400,000
$300,000
$0
$335,024
$268,019
$0
$300,000
$0
$351,775
$281,420
$0
$300,000
$0
$369,364
$295,491
$0
$300,000
$0
$387,832
$310,266
$0
$300,000
$0
$407,224
$325,779
$400,000
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
INVESTMENTS
Annual Capital Outlays
Start Up Costs
Additional Scott People To Manage CM
Additional Scott Travel
Molds
Buyback Lease Option
5%
$0
$30,000
TOTAL INVESTMENTS
5%
$0
Only hourly wage employees counted (i.e. direct labor personal and temporary workers)
$0.91
0%
39.5%
39.5%
39.5%
39.5%
39.5%
39.5%
$0.91
$1.27
$1.77
$2.47
$3.45
$4.81
$6.71
195
2%
2%
2%
2%
2%
2%
(Productivity assumed to increase at 2% annually.)
195
191
187
184
180
176
173
$354,900
$485,184
$663,295
$906,790
$1,239,673
$1,694,757
$2,316,902
(Assuming a 5 day work week, 8 hours/day and a 50 week year)
5.00% <--annual growth rate
$0.0650
$0.0683
$0.000
$0.000
8,000,000
8,000,000
$520,000
$546,000
Lease
Total Costs
5%
$0
$8,150,000
$772,500
$796,125
$820,931
$846,978
$1,274,327
$903,043
$933,195
$964,855
$998,098
$1,433,003
$19,466,742
$12,546,685
$13,112,449
$13,792,099
$14,623,899
$16,060,048
$16,971,792
$18,656,412
$20,846,775
$23,724,396
$27,937,286
1.00
$19,466,742
0.8696
$10,910,161
0.7561
$9,914,895
0.6575
$9,068,529
0.5718
$8,361,262
0.4972
$7,984,682
0.4323
$7,337,374
0.3759
$7,013,636
0.3269
$6,814,848
0.2843
$6,743,954
0.2472
$6,905,670
$100,521,752
10 YR NPV
12
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10 YR NPV
TEMECULA
CHINA
100,467,939 $
86,729,016
100,467,939 $
87,082,378
100,467,939 $
87,493,006
100,467,939 $
87,970,776
100,467,939 $
88,527,175
100,467,939 $
89,175,540
100,467,939 $
89,931,321
100,467,939 $
90,812,373
100,467,939 $
91,839,289
100,467,939 $
93,035,768
100,467,939 $
94,429,021
100,467,939 $
96,050,229
100,467,939 $
97,935,046
100,467,939 $
100,124,153
100,467,939 $
102,663,878
100,467,939 $
105,606,869
100,467,939 $
109,012,846
100,467,939 $
112,949,412
$120,000,000
$100,000,000
$80,000,000
$60,000,000
10 YR NPV TEMECULA
10 YR NPV CHINA
$40,000,000
$20,000,000
10 YR NPV
$0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39% 42% 45% 48% 51%
China Hourly Labor Cost Change
13