7/27/2019 Bid Structure Model Question

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Aniket Chauhan

1Bid Structure Model Question

Consider a Telecom company FILI TELECOM with operations in the US. The company manufactures

mobile phones as well as provides 3G and 4G networks for its users.

The company is looking for an outsourcing partner who will help it manufacture all spares and help it

assemble handsets. This constitutes about 40% of the companys total profits. The total profits annually

are estimated to be about $3.2 billion with an increase of 2.5% in profits annually. There is an initial

setup cost involved which is 60% of the first years profits. Yearly inflation too needs to be adjusted @

10% per annum.

Considering that the contract is to be signed for 5 years with terms open for renegotiation at the end of

the first term; what is the bid amount you as the CFO of XYZ Ltd. offer.

Also mention basic terms that would make your bid look the most attractive.

Bid

To be noted

The annual profit in this case is given and its also mentioned that the parent firm wishes tooutsource 40% of its profit generation.

Next, note that the profits increase annually by 2.5% and that needs to be adjusted beforecalculating the profits from the 2nd year onwards.

Since there is no recurring cost to be incurred on the setup; the one time setup cost as per thegiven condition is calculated and subtracted from the profits that will be generated in the first

year.

The inflation is the only adjustment to be done on a yearly basis for all 5 years. Annual Earned Profits = Annual Profit (Initial Setup Cost + Inflation) Cumulative Profit = Sum of all annually earned profits

7/27/2019 Bid Structure Model Question

2/2

Aniket Chauhan

2

Annual Profit 3,200,000,000$

Outsourced Business (@40%) 1,280,000,000$

Year 1 Year 2 Year 3 Year 4 Year 5

Profits (increasing annually by 2.5%) 1,280,000,000$ 1,312,000,000$ 1,344,800,000$ 1,378,420,000$ 1,412,880,500$

Initial Setup Cost (@60%) 768,000,000.0$

Inflation adjustment (@10%) 128,000,000$ 131,200,000$ 134,480,000$ 137,842,000$ 141,288,050$

Total Earned Profits 384,000,000$ 1,180,800,000$ 1,210,320,000$ 1,240,578,000$ 1,271,592,450$

Cumulative Profits earned 5,287,290,450$

Now, the actual bid amount has to be adjusted with the inflation in the last year as that figure iskept as a buffer for changing market conditions.

Final Bid Amount = Cumulative Profits earned Inflation for 5th year Final Bid Amount = $5287290450 - $141288050 = $ 5146002400

Renegotiation Conditions

These conditions are to be added on the basis of best outsourcing practices from your previous notes.