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CASE STUDY The life estimates were developed by two different individuals a design engineer and a manufacturing manager. They have asked that, at this stage of the project, all analyses be performed using both life estimates for each system. ROR ANALYSIS WITH ESTIMATED LIVES THAT VARY Background Make- ABC C three-dimensional computer models, containing a wide variety of part shapes with machined and highly finished (ultra- smooth) surfaces. The product of the system is the numerically controlled (NC) machine code for the part's manufacturing. Additionally, Make-to-Specs will build the code for superfine finishing of surfaces with continuous control of the finishing machines to-Specs is a software system under development by of Case Study Exercises Use spreadsheet analysis to determine the following 12%, which server should be selected? 1. If the MARR 2. Use incremental ROR analysis to decide between the 3. Use the PW or AW method to make the selection servers at MARR = 1 2%. Use any method of economic analysis to display on the spreadsheet the value of the incremental ROR between server 2 with a life estimate of 5 years and a life estimate of 8 years Information There are two alternative computers that can provide the server function for the software interfaces and shared da- tabase updates on the manufacturing floor while Make-to- Specs is operating in parallel mode. The server first cost and estimated contribution to annual net cash flow are summarized below. Server 1 100,000 35,000 Server 2 200,000 50,000 year 1, plus 5000 per year for years 2, 3, and 4 First cost, S Net cash flow. Slyear (gradient) 70,000 maximum for years 5 on, even if the server is replaced Life, years or or A NEW ENGINEERING GRADUATE CAN HELP HIS forex the current trend of negative net profit will avi st. Jobe Kettler, and new daughtesiis wife, Janise, Coast Wholesale Auto Parts is worth a net $2 million. Suzanne Elmer's wish is to sell out completely after 5 more whether to sell it, expand it, lease it, or what. But nw can keep doing the same thing for many more lly want to do is to keep it for 5 more years Elmer Kettler said to his Janise, penses and SI.15 million per year in revenue. Elmer had an appraisal last year, and the report indicated Gulf were gathered around the dinner table. Elmer on Gulf Coast Wholesale a turing s osned and operated for 25 years on the south- b Emer years at this price, and to make a deal that the new sharing thoughts on Gulf Coust Who time) and the same amount for the next 3 years Option 4: Trade-out. Elmer has a close friend in the auntique auto parts business who is making a "killing. le Auito Parts, a owner pay $50000 per year at the end of year 5 f Houston. Texas. The business has excellent con- ly with several national retailers operating APA, AutoZone, O'Reilly, and Advance. Addi- Calf Coast operates a rebuild shop serving these same tomobile components, such as carburetors, NA so he says, with e- commerce. Although the possibility is risky, it is enticing to Elmer to consider a whole new line of parts, but still in the basic business that he al ready understands. The trade-out would cost an esti- as, and air conditioning compressors Ar his home after dinner, John decided to help his father mated S1 million for Elmer immediately. The 10-year of annual expenses and revenues is consider- sciness? John graduated just last year with an engineering ably higher than for his current business. Expenses are million per year and revenues at yie an important and difticult decision: What to do with his degrec from a major state university in Texas, where he com a course in engineering economy. Part of his job at Industries is to perform basic rate of return and $3.5 million each year Option 5: Lease arrangement Gulf Coast could be leased to some turnkey company with Elme the owner and bearing part of the expenses for delivery trucks, insurance, etc. The firsd-cut estimates for this option are $1.5 million to get the business ready now, with annual expenses at $500,000 per year and revenues at S1 million per year for a 10-ycar contract reset worth analyses on energy management proposals Oner the next few weeks, John outlined five options, includ ing his dad's favorite of selling in 3 years. John summarized all the estimates over a 10-year horizon. The options and esimates were given to Elmer, and he agreed with them. Case Study Exercises Help John with the analysis by doing the following Option I: Remove rebuild. Stop operating the re- selling wholesale parts. The removal of the rebuild operations and the ch to an "all-parts house" are expected to cost 5750,000 in the first year. Overall revenues will drop to S1 million the first year with an expected 4% increase per year thereafter. Expenses are projected SOS million the first year, increasing 6% per year build shop and concentrate on 1. Develop the actual cash flow series and incremental cash flow series (in S1000 units) for all five options ia preparation for an incremental ROR analysis 2. Discuss the possibility of mulktiple rate of returs values for all the actual and incremental cash Bow series F any tmultiple rates in the range of 0% to 100% lf John's father insists that he make 25% per year or are on the selected option over the nest 10 years,wht huld he do? Use all the methods of ecomeic analysis you have learned so far (PW, AW, ROR so Jobn's father can understand the recommendation in cne way or another 3. Option 2: Contract rebuild operations. To get the rebuild shop ready for an operations contractor to will cost $400,000 immediately. If ex y the same for 5 years, they will average per year, but they can be expected to nise to $2 million per year in year 6 and thereafter. Elmer thinks revenues under a contract arrangement 4 million the first year and can rise 5% per take pen 4 Prepare plots of the PW vensas fo Estimate the breakeven rate of ret 5. What is the minimum amount cach of years 5 through 8 for wants) to be best economicalyGiven this amount year for the duration of a 10-year contract. Otion 3: Maintain status quo and sell out afer 5 years lEmer's personal favorite). There is no cost now, but what does the sale price have besed gpotn a siady by Alan C. Siewart, Consultant, Communications and High Tech Solutions Engineering. Ace Cosultant. CASE STUDY The life estimates were developed by two different individuals a design engineer and a manufacturing manager. They have asked that, at this stage of the project, all analyses be performed using both life estimates for each system. ROR ANALYSIS WITH ESTIMATED LIVES THAT VARY Background Make- ABC C three-dimensional computer models, containing a wide variety of part shapes with machined and highly finished (ultra- smooth) surfaces. The product of the system is the numerically controlled (NC) machine code for the part's manufacturing. Additionally, Make-to-Specs will build the code for superfine finishing of surfaces with continuous control of the finishing machines to-Specs is a software system under development by of Case Study Exercises Use spreadsheet analysis to determine the following 12%, which server should be selected? 1. If the MARR 2. Use incremental ROR analysis to decide between the 3. Use the PW or AW method to make the selection servers at MARR = 1 2%. Use any method of economic analysis to display on the spreadsheet the value of the incremental ROR between server 2 with a life estimate of 5 years and a life estimate of 8 years Information There are two alternative computers that can provide the server function for the software interfaces and shared da- tabase updates on the manufacturing floor while Make-to- Specs is operating in parallel mode. The server first cost and estimated contribution to annual net cash flow are summarized below. Server 1 100,000 35,000 Server 2 200,000 50,000 year 1, plus 5000 per year for years 2, 3, and 4 First cost, S Net cash flow. Slyear (gradient) 70,000 maximum for years 5 on, even if the server is replaced Life, years or or A NEW ENGINEERING GRADUATE CAN HELP HIS forex the current trend of negative net profit will avi st. Jobe Kettler, and new daughtesiis wife, Janise, Coast Wholesale Auto Parts is worth a net $2 million. Suzanne Elmer's wish is to sell out completely after 5 more whether to sell it, expand it, lease it, or what. But nw can keep doing the same thing for many more lly want to do is to keep it for 5 more years Elmer Kettler said to his Janise, penses and SI.15 million per year in revenue. Elmer had an appraisal last year, and the report indicated Gulf were gathered around the dinner table. Elmer on Gulf Coast Wholesale a turing s osned and operated for 25 years on the south- b Emer years at this price, and to make a deal that the new sharing thoughts on Gulf Coust Who time) and the same amount for the next 3 years Option 4: Trade-out. Elmer has a close friend in the auntique auto parts business who is making a "killing. le Auito Parts, a owner pay $50000 per year at the end of year 5 f Houston. Texas. The business has excellent con- ly with several national retailers operating APA, AutoZone, O'Reilly, and Advance. Addi- Calf Coast operates a rebuild shop serving these same tomobile components, such as carburetors, NA so he says, with e- commerce. Although the possibility is risky, it is enticing to Elmer to consider a whole new line of parts, but still in the basic business that he al ready understands. The trade-out would cost an esti- as, and air conditioning compressors Ar his home after dinner, John decided to help his father mated S1 million for Elmer immediately. The 10-year of annual expenses and revenues is consider- sciness? John graduated just last year with an engineering ably higher than for his current business. Expenses are million per year and revenues at yie an important and difticult decision: What to do with his degrec from a major state university in Texas, where he com a course in engineering economy. Part of his job at Industries is to perform basic rate of return and $3.5 million each year Option 5: Lease arrangement Gulf Coast could be leased to some turnkey company with Elme the owner and bearing part of the expenses for delivery trucks, insurance, etc. The firsd-cut estimates for this option are $1.5 million to get the business ready now, with annual expenses at $500,000 per year and revenues at S1 million per year for a 10-ycar contract reset worth analyses on energy management proposals Oner the next few weeks, John outlined five options, includ ing his dad's favorite of selling in 3 years. John summarized all the estimates over a 10-year horizon. The options and esimates were given to Elmer, and he agreed with them. Case Study Exercises Help John with the analysis by doing the following Option I: Remove rebuild. Stop operating the re- selling wholesale parts. The removal of the rebuild operations and the ch to an "all-parts house" are expected to cost 5750,000 in the first year. Overall revenues will drop to S1 million the first year with an expected 4% increase per year thereafter. Expenses are projected SOS million the first year, increasing 6% per year build shop and concentrate on 1. Develop the actual cash flow series and incremental cash flow series (in S1000 units) for all five options ia preparation for an incremental ROR analysis 2. Discuss the possibility of mulktiple rate of returs values for all the actual and incremental cash Bow series F any tmultiple rates in the range of 0% to 100% lf John's father insists that he make 25% per year or are on the selected option over the nest 10 years,wht huld he do? Use all the methods of ecomeic analysis you have learned so far (PW, AW, ROR so Jobn's father can understand the recommendation in cne way or another 3. Option 2: Contract rebuild operations. To get the rebuild shop ready for an operations contractor to will cost $400,000 immediately. If ex y the same for 5 years, they will average per year, but they can be expected to nise to $2 million per year in year 6 and thereafter. Elmer thinks revenues under a contract arrangement 4 million the first year and can rise 5% per take pen 4 Prepare plots of the PW vensas fo Estimate the breakeven rate of ret 5. What is the minimum amount cach of years 5 through 8 for wants) to be best economicalyGiven this amount year for the duration of a 10-year contract. Otion 3: Maintain status quo and sell out afer 5 years lEmer's personal favorite). There is no cost now, but what does the sale price have besed gpotn a siady by Alan C. Siewart, Consultant, Communications and High Tech Solutions Engineering. Ace Cosultant