Reference no: EM132045366
Is there an expert that can assist in solving the attached net present value problem? There are several variables that I do not understand how to integrate. Thank you
The CNC machines were breaking down creating bottlenecks.
French believed the key to relieving this bottleneck would be increasing capacity. It not only would prevent downtime but also would allow the company to take on new business. If capacity increased, French estimated that sales revenues would rise by at least $50,000 per month due to unmet demand and increased efficiency. The company’s margins on the additional revenues were expected to be 35%.
French saw three viable options to increase capacity:
1. Purchase an additional CNC machine for cash,
2. Finance the purchase of an additional CNC machine, or
3. Add a third shift (a night shift) to better utilize the two CNC machines Peregrine already owned. French considered the details of each option, keeping in mind that for long-term projects he would use a discount rate of 7%.
OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH Although it would be costly, the idea of adding a third CNC machine appealed to French. It would provide him peace of mind that if there were a breakdown, jobs would continue on schedule. French’s preliminary research revealed that the cost of the new equipment would be $142,000. He also estimated that there would be increased out-of-pocket operating costs of $10,000 per month if a new machine were brought online. After five years, the machine would have a salvage value of $40,000. Although Peregrine did not have the cash readily available to make the purchase, French believed that with a small amount of cash budgeting and planning, this option would be feasible.
OPTION 2: FINANCE THE PURCHASE OF A NEW CNC MACHINE The company selling the CNC machine also offered a leasing option. The terms of the lease included a down payment of $50,000 and monthly payments of $2,200 for five years. After five years, the equipment could be purchased for $1. The operating costs and salvage values would be the same as option 1, the purchasing option. The company had the necessary cash on hand to make the down payment for the lease. With both the leasing and purchasing options, the company had sufficient space to operate the new equipment, and French believed he had almost all of the right employees in place to execute this plan.
OPTION 3: ADD A THIRD SHIFT French and one of his co-investors had extensive experience in the trucking industry and had seen firsthand the effect of utilizing equipment around the clock. French believed adding a third shift could unlock a lot of value at Peregrine, and it could be done at a low cost. Adding a third shift would involve moving several existing employees to work the night shift and would also mean hiring some new employees. Although French believed that in time he may add a full third shift to increase overall capacity, his initial plan was for the night shift to run as a “skeleton crew” with the primary purpose of keeping the CNC machines operational for 24 hours. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his existing shifts. He estimated that adding a third shift would create $12,000 in additional monthly out-of-pocket operating costs, but no new machinery would need to be purchased. Based on his trucking experience, French knew this option would be difficult to execute, as there were major safety and supervision challenges associated with running a night shift. MOVING FORWARD French wanted to get moving on a solution and arranged a conference call with his two co-owners. He knew his coowners would be eager to learn the numbers behind each option, but he also knew that nonfinancial information would be just as crucial in making a recommendation. Before the call, French sat down at his desk to fully analyze the options.
ASSIGNMENT QUESTIONS
1. Compute and compare the net present value and payback period of each option.
2. Rounding to the nearest 1%, at what discount rate does leasing produce a higher net present value than paying cash?
What is the project equivalent annual cost or eac
: If the required return is 19 percent, what is the project's equivalent annual cost, or EAC?
|
Explain the core values of agile project management
: Essentially, Agile project management means using the best process through empowered teams, customer involvement, and the ability to analyze and quickly.
|
Show the connection between postings on facebook
: How might the government show the connection between postings on Facebook and those who post them? Discuss.
|
Differences that will affect the team building process
: What are political, cultural, language and technological differences that will affect the team building process?
|
Higher net present value than paying cash
: what discount rate does leasing produce a higher net present value than paying cash?
|
Discussing the issues of professional ethics
: Do you think that an "Ethics Bowl" competition at your institution would be useful in discussing the issues of professional ethics? Why or why not?
|
What challenges or opportunities is it facing right now
: Companies are moving toward technologies to not only aggregate the information so the store can organize better to satisfy the customer.
|
The importance of considering the financial risk of rivals
: Explain the importance of considering the financial risk of rivals, customers, suppliers, and other counter-parties.
|
The firm cost of common equity and re
: A stock has a Beta of 1.0. The risk-free rate is 5.7%, and the Market Risk Premium is estimated at 6.5%. The firm's cost of common equity, Re,
|