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.
|
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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