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

Business Brain

Business Brain

Among the hardest transitions for individuals is to move from the employee to the entrepreneur mentality. The idea of getting on your own, getting your own business is fantastic. It's the desire of a lot of individuals to leave their jobs and get to be successful business owners.

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