Questions

1. Construct spreadsheets for calculating present worths of the three proposals. For each proposal, you need to calculate PWs for each of 5%, 10%, and 15% demand growth and SO.03,

$0,035, and S0.04 selling price (nine combinations in all). Present the results in tabular and/or graphical format to support your analysis. A portion of a sample spreadsheet layout is given in Table A.2.

2. Write a memo to Clem presenting vour findings. The goal of the analysis is to determine if bringing production in-house appears feasible, and if so, which machine purchase sequence(s) should be studied in further detail. The memo should contain a tentative recommendation about which option looks best and what additional research, if any, should be done. Keep the memo as concise as possible.

Table A.2 Portion of a Present Worth Spreadsheet

Sequence: El machine purchased at time 0

Projected Demand Growth

5%

/year

Projected Selling Price

$0.03

/piece

Year

0

1

->

5

4

Projected Demand (units)

2 400 000

2 520 000

2 646 000

2 778 300

Capacity (units)

3 600 000

3 600 000

3 600 000

3 600 000

Purchases (units)

0

0

0

0

Sales (units)

1 200 000

1 080 000

954 000

821 700

Operating Cost

SO

-$126 000

-S126 000

-$126 000

-S126 000

Purchasing Savings

$0

$120 000

$126 000

S132 300

$138 915

Sales Revenue

$0

$36 000

$32 400

$28 620

S24 651

Capital Expenditure

-$125 000

$0

$0

$0

$0

Net Cash Flow

-$125 000

S30 000

$32 400

$34 920

$37 566

Present Worth

$8490

Engineering Economics in Action, Part 7A: You Need the Facts

7.1 Introduction

7.2 A Replacement Example

7.3 Reasons for Replacement or Retirement

7.4 Capital Costs and Other Costs

7.5 Defender and Challenger Are Identical

7.6 Challenger Is Different From Defender; Challenger Repeats Indefinitely

7.6.1 Converting From Subcontracted to In-House Production

7.6.2 The Irrelevance of Sunk Costs ls,3 When Capital or Operating Costs Are Non-Monotonic

7.7 Challenger Is Different From Defender; Challenger Does Not Repeat

Review Problems Summary

Engineering Economics in Action, Part 7B: Decision Time

Problems Mini-Case 7.1

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