Door2DoorCo are a large courier company who have just received ashipment of X new vans. They wish to lock in a tyre supply contractto keep these vans well shod over the Y months that they intend tokeep the vans. The vans come with low quality tyres that will needto be replaced in 2 months. Two suppliers, ThriftyTread andWiserWheels have expressed interest at supplying tyres at a fixedprice 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, illustrateDoor2DoorCO’s tyre expenditure for the new vans as a fully labelledtimeline diagram. (Remember that there are X new vans, and assumeeach van has 4 tyres.)
b) Determine the value in period 2 dollars of the expenditurestream if Door2DoorCo decide to go with ThriftyTreads. [Hint, youwill firstly need to find the j3 rate equivalent to the corporatediscount rate, you will then need to find the PV of the expenditurestream in period 2 dollars]
c) Thus determine the present value of the expenditure stream ifDoor2DoorCo decide to go with ThriftyTreads. [NB this is a bittricky and is aimed at stronger students]
d) Determine the value in period 2 dollars of the expenditurestream if Door2DoorCo decide to go with WiserWheels.
e) Thus determine the present value of the expenditure stream ifDoor2DoorCo decide to go with WiserWheels [NB this is a bit trickyand 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 shouldchoose.
g) Suggest three legitimate business considerations which amanager may take into account that might influence or even changethe recommendation from part (f). NB “These tyres are prettier”,“This company will bribe me with a kickback”, or “My wife works forthat company” are NOT legitimate business reasons. (Write around20~30 words explaining/justifying each consideration.)
