can you please explain what we need to solve and what formula.Curly, Maureen $($Mo to her friends$),$ and Larry founded CML Mechanical Engineers nearly

ten years ago. The firm has grown substantially, and it now employs $28$ engineers. CML

emphasizes industrial and commercial work related to the construction of facilities. For

example, they have designed heating and ventilation systems for factories and shopping

malls, piping for refineries and chemical plants, and even a treatment facility for oil tanker

ballast water. Obviously, they have undertaken many other jobs over the years, but these

represent their market niche.

When CML first started business, most of the work was subcontracts for heating and

ventilation systems for individual buildings. The jobs are now larger, more complex, and

technically far more sophisticated, but CML still generally works as a subcontractor to

another design firm. None of the founders, who are still the owners, want to diversify into

other branches of engineering or into more general construction or into project management.

They enjoy being in close contact with the technical details, even though they do relatively

little design work themselves.

Virtually all of the analysis and technical drawings are done with an ever$-$increasing array

of software packages. However, there are beginning to be problems in interfacing with the

project management software used by some of their clients. Furthermore, they would like to

link the firm$$s accounting and time tracking and billing software with the firm$$s software for

design, drawing, and project management.

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$153$

They believe that this integration will allow automatic tracking of time spent on work

packages, progress on contracts, and billing breakdowns by project type, client, and

employee. This will in turn support more accurate estimating for bidding on future work.

It appears that software packages costing about $$25,000$ initially are needed, and then

there would be a $15\%$ annual fee. This fee covers service, answering questions, and periodic

updates. Another $$30,000$ would be needed for a contract with a software integration firm.

Initial training of the firm$$s employees is estimated at $$12,000,$ and about one$-$sixth of that as

an annual expense. From looking at their history of software usage, they estimate that the life

of this $$generation$$ of software will be about $5$ years.

Curly was assigned the job of estimating the value of having the integrated software,

while Mo and Larry examined possible sources of financing. Should the firm get the

software? If so$,$ use their three memos and the firm's financial statements to define an

acquisition plan. This plan should identify the timing of the purchases and the source of funds

for the purchase. What is the rate of return of your proposal?

Suggestion to the Student

If enough jobs are lost, the firm may have to shrink; but the danger of this can be judged by

comparing lost billings to annual billings. The income statement can also be used to estimate

the average contribution to profit and overhead from billed projects.

Cases in Engineering Economy $2$ nd by Peterson & Eschenbach

$154$

To: Mo & Larry

From: Curly

About: Projected Financial Impact of Integrating Data Flow between Packages

Last year we lost four jobs with estimated billing of $$45,000$ because we could not meet

client data flow expectations. We bid on and received jobs that covered $60\%$ of these

potential billings, and we were only out$-$of$-$pocket about $$6000$ in unbillable wages. Even this

time was productively spent on an internal short course on changes in OSHA standards.

I$\text{'}$m guessing, but I expect to lose two more jobs each year that we are without the

integrating software. It will also become increasingly difficult to obtain other work. I would

guess that a $10\%$ to $20\%$ drop in replacement billings would occur each year. Thus, next year

I would expect $6$ jobs to be lost, and that we would only be able to replace $40\%$ to $50\%$ of the

billings.

Since we do not really want to expand, I've not analyzed this as a problem in attracting

new business. But we certainly do not want to reduce the scope of our operations, so I believe

we should purchase the software.

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To: Curly & Larry

From: Mo

About: Alternative Financing of Possible Software Purchases

We all know that we've cut our margins to the bone on last year's bids. I still believe this

was the right response to the downturn in construction in our part of the oil patch. We have

managed to stay busy, but last year's profits and this year's projections are essentially zero. If

it weren't for the payments on our building and the depreciation on it$,$ both our cash flow and

profit pictures would improve.

You know I hate to borrow money, so that only leaves me with the option of bringing

new stock into the business. We could attempt to bring in a fourth partner, but I would rather

sell stock to some of our principal engineers and maybe even other long$-$term em