Engineering Economy Case Study Problem

Fx, Inc. is a volume manufacturer of high technology automotive mirrors (including cell and voice activation). FX is looking to expand their operations to add a second product line capable of producing 1.3 Million units per year. The equipment investment cost for this new operation is $23 Million. The project falls under a 7-year MACRS class life, and the company estimates that the salvage value will be $2.7 Million at the end of the 6-year project. The average selling price for each mirror is $89 per unit. The annual expected sales are shown below:

Year: 2019	2020	2021	2022	2023	2024
Volume: 300,000	450,000	550,000	750,000	900,000	1,000,000

The material cost for each mirror is $20. The labor cost to produce each mirror is $13 with the additional carriable cost of manufacturing at $15 per unit. The fixed cost of manufacturing operations is $10 Million per year. Assume that FX has a tax rate of 25%. Also, assume that FX uses a MARR of 15% for all economic analysis.

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a) What is the Net Present Value of the investment? Do you accept this project?

b) If the company could borrow $15 Million of the initial investment at 10% that will be paid in six installments, how would this change the NPV calculation? Do you recommend getting the loan?

c) Perform sensitive analysis on +/- 20% changes in volume, initial investment, unit variable cost, and salvage value from part b. Graph your data. Identify the key variables.