You are the engineering representative on a team for a new product introduction. The proposed manufacturing process uses a semi-automated machine along with people. Components for each unit of the product cost $8 (Note: This is raw material cost for each unit). The semi-automated machine costs $1,500,000 and it has a 7-year MACRS recovery period. The salvage value is $0 for this specially designed machine. This machine can manufacture 175 units per hour. Required Production Volume (1000s) Year 1 2 3 4 5 6 7 8 9 Volume 195 275 385 550 625 695 630 550 295 The normal manufacturing operation runs 8 hours per shift per day. Initial production would begin with one shift, 5 days a week. Each working year has 50 weeks (250 regular working days) to allow for vacations. The total labor cost is $50 for each regular time hour that the machine operates and $65 for overtime. The production operation can operate a maximum of 8 extra hours/week, if needed to meet the demand without adding an extra shift. Employee likes to earn some overtime. Thus, the overtime option is more desirable than adding a second shift if overtime can meet the demand. Other require information: Corporate MARR 12% (after tax) Tax Rate 35% Maintenance Cost 12% of raw material cost Overhead cost 2% of raw material (utilities, supervision, marketing, etc.) The decision of whether to release the new product into production requires answers to the following questions (considering planning horizon = 9 years):

1. What average selling price of the finished product would be required to yield a 20% After-Tax rate of return (After-Tax IRR)?

2.How does the variation in After-Tax MARR impact After-Tax Net Present Value (ATNPV)? (To answer this question, calculate After-Tax Net Present Value for different values of After-Tax MARR (ATMARR) ranging from 0% to 25% (considering raw material cost per unit is $8 and selling price is $10.5 per unit) and plot After-Tax Net Present Value vs. MARR).

3. Is the After-Tax Net Present Value (ATNPV) more sensitive to changes in raw material cost or changes in selling price? To answer this question, follow the steps below: a. Considering selling price per unit as $10.50 and After-Tax MARR as 12%, calculate After-Tax Net Present Value (ATNPV) for raw material cost ranging from $4/unit to $12/unit. Then , plot After-Tax Net Present Value vs. raw material cost. b. Considering raw material cost per unit as $8 and After-Tax MARR as 12%, calculate After-Tax Net Present Value (ATNPV) for selling price ranging from $4/unit to $12/unit. Then , plot After-Tax Net Present Value vs. selling price. c. Find the slope of line in both plots (of a and b) and compare the absolute value of the slopes.

4. If variability of selling price per unit (consider current selling price is $10.50 per unit) may range from -15% to +15% (i.e. selling price per unit cannot decrease by less than 15% of the current selling price and cannot increase by more that 15% of the current selling price) and variability of raw material cost per unit (consider raw material cost per unit as $8) may range from -15% to +15%, find After-Tax Net Present Value (ATNPV) ATMARR 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% ATNPV Raw Material Cost/Unit 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11 11.5 12 ATNPV Selling Price/Unit 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10 10.5 11 11.5 12 ATNPV CASE STUDY 3 for simultaneous change in selling price and raw material cost to fill the table below (consider After-Tax MARR is 12%): ATNPV Selling Price Raw Material Cost -15% -10% -5% 0% 5% 10% 15% -15% -10% -5% 0% 5% 10% 15%

5. If required Annual production volume is Y units, raw material cost per unit is $8, selling price is $10.5 per unit and After-Tax MARR is 12%, what is the value of Y at which After-Tax Net Present Value (ATNPV) is 0 ? ------------------------------------------------------------------------------------------------------------------