ENTR 3120 Mini case Victoria\'s Equipment Manufacturing Ltd Victoria\'s Equipmen
ID: 2433831 • Letter: E
Question
ENTR 3120 Mini case Victoria's Equipment Manufacturing Ltd Victoria's Equipment Manufacturing Lud (VEM) fabricates a specialized drilling machine (the CF128) for the resource industries. They work with large consulting firms and the resource companies around the world and are running their manufacturing shop at full capacity. Although they keep up with current demand for the drilling machine they sell, the CF128, VEM has an opportunity to purchase a new manufacturing system. It is called the Integrated Drilling Machine System (or IDMS for short) that would allow them to produce many different types of drilling machines, not just the CF128. The IDMS has an increased production capacity of 120% over the current shop machinery. In order to purchase the IDMS they would have to stop work on their current jobs to dismantle and clear out their current shop machines and then install the new IDMS. They expect the down time to last 4 wecks and to cost VEM S50,000 per week in lost profits and costs. In addition, VEM will have to lay off three current operators at $20,000 each. There is also a significant training cost to learning how to properly run the 3D printer, which has been determined to be $75,000. The upside is reduced wage costs (estimated at S60,000 per person per year) as the number of people involved in manufacturing would drop from 9 to 6. Maintenance costs on the IDMS increase over time; the first year is expected to be zero; year's 2 to 4 are forecasted at $15,000 per year, and year's 5 to 8 are budgeted at S25,000 per year. Maintenance costs on the current machinery average $30,000 per year. Utility costs are expected to decrease by $850 per month. Victoria has talked to her bank, which will loan her S500.000 at an 8% rate to assist with the purchase of the IDMS; the loan requires an annual interest payment and a lump sum payment of the $500,000 at the end of five years. She believes she could sell the machinery in her current shop for S150,000, which would give her enough cash, along with her current cash in the bank, to purchase the IDMS at a cost of S1,200,000. There is an upfront payment of $900,000 (S500,000 from the bank and $400,000 from cash) and a second payment of $300,000 at the end of year l The estimated life on the IDMS is 8 years with an estimated residual value of S150,000. Her current machinery would also last 8 years but would have no residual value and would require repairs in year 1 (S24,000), year 3(S28,000), year 5 (S32,000) and year 7 ($36,000), Victoria requires an 1 1% rate of return on all investments. Required You are to prepare a report to Victoria Lao, President of VEM, covering the following two scenarios: A) Assuming no increase in sales should Victoria Manufacturing purchase the IDMS and replace their current machinery? Explain why or why not. B) What increase in annual sales would make the NPV of the IDMS purchase C) After calculating the answer to B would you amend your answer to A?Explanation / Answer
VICTORIA'S EQUIPMENT IN CLASS ANALYSIS
Maintenance costs
>1 year
>2nd to 4th year
>5th to 8th year
1
3
4
0
15000
25000
0.90
2.202
2.044
0
33030
51100
note 1) savings in repair
there is a financialy net loss of 165000 from purchasing IDMS hence it should not be purchased.
2) To make purchasing IDMS decision viable, there should be increase in sales which could generate profit equal or more than the net loss of 165000.
annual increase = 165000/ pv factor of 8 years
= 165000/5.146 = 32063.74 per year
3) IF the increase in sales in around 32000 , IDMS should not be purchase for just a littile more profit.because there can be hidden costs or unexpected costs as well. if increase is much more than 32000 then IDMS can be purchased.
ITEM YEARS $ PV FACTOR TOTALS Downtime cost(4*50000) 0 200000 1 200000 operator's cost(3*20000) 0 60000 1 60000 Training cost 0 75000 1 75000 Saving in wages(60000*3) 8 (180000) 5.146 (926280)Maintenance costs
>1 year
>2nd to 4th year
>5th to 8th year
1
3
4
0
15000
25000
0.90
2.202
2.044
0
33030
51100
Savings in maintenance cost 8 (30000) 5.146 (154380) Savings in utility cost(850*12) 8 (10200) 5.146 (52489) Interest on loan(500000*8%) 8 40000 5.146 205840 Repayment of loan 1(5th yr) 500000 0.593 296500 Sale of machinery 0 (150000) 1 (150000) Upfront payment 0 400000 1 400000 Second payment 1(1st yr) 300000 0.90 270000 residual value 1 (8th yr) (150000) 0.434 (65100) savings in repair (note) - - - (78200) Net cost 165000Related Questions
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