2. Compute and compare the net present value and payback period of each option.

INTRODUCTION was ready for retirement; Peregrine had fit the bill. Founded French considered the details of each option, keeping in purchased. Based on his trucking experience, French knew mind that for long-term projects he would use a discount rate this option would be difficult to execute, as there were major of 7%. safety and supervision challenges associated with running a night shift. OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH Although it would be costly, the idea of adding a third CNC MOVING FORWARD machine appealed to French. It would provide him peace of mind that if there were a breakdown, jobs would continue French wanted to get moving on a solution and arranged on schedule. French's preliminary research revealed that a conference call with his two co-owners. He knew his cothe cost of the new equipment would be $142,000. He also owners would be eager to learn the numbers behind each estimated that there would be increased out-of-pocket option, but he also knew that nonfinancial information would operating costs of $10,000 per month if a new machine were be just as crucial in making a recommendation. Before the brought online. After five years, the machine would have a call, French sat down at his desk to fully analyze the options. salvage value of $40,000. Although Peregrine did not have the cash readily available to make the purchase, French ASSIGNMENT QUESTIONS believed that with a small amount of cash budgeting and planning, this option would be feasible. 1. Without using any numbers, identify the strengths and weaknesses of the three options identified by French. OPTION 2: FINANCE THE PURCHASE OF A NEW CNC MACHINE Are there any other options French should consider? The company selling the CNC machine also offered a leasing option. The terms of the lease included a down 2. Compute and compare the net present value and payback payment of $50,000 and monthly payments of $2,200 for five period of each option. years. After five years, the equipment could be purchased 3. Make a recommendation for French. for $1. The operating costs and salvage values would be the 4. Rounding to the nearest 1%, at what discount rate does same as option 1, the purchasing option. The company had cash? the necessary cash on hand to make the down payment for the lease. With both the leasing and purchasing options, the company had sufficient space to operate the new equipment, and French believed he had almost all of the right employees in place to execute this plan. OPTION 3: ADD A THIRD SHIFT French and one of his co-investors had extensive experience in the trucking industry and had seen firsthand the effect of utilizing equipment around the clock. French believed adding a third shift could unlock a lot of value at Peregrine, and it could be done at a low cost. Adding a third shift would involve moving several existing employees to work the night shift and would also mean hiring some new employees. Although French believed that in time he may add a full third shift to increase overall capacity, his initial plan was for the night shift to run as a "skeleton crew" with the primary purpose of keeping the CNC machines operational for 24 hours. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his existing shifts. He estimated that adding a third shift would create $12,000 in additional monthly out-of-pocket operating costs, but no new machinery would need to be INTRODUCTION was ready for retirement; Peregrine had fit the bill. Founded French considered the details of each option, keeping in purchased. Based on his trucking experience, French knew mind that for long-term projects he would use a discount rate this option would be difficult to execute, as there were major of 7%. safety and supervision challenges associated with running a night shift. OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH Although it would be costly, the idea of adding a third CNC MOVING FORWARD machine appealed to French. It would provide him peace of mind that if there were a breakdown, jobs would continue French wanted to get moving on a solution and arranged on schedule. French's preliminary research revealed that a conference call with his two co-owners. He knew his cothe cost of the new equipment would be $142,000. He also owners would be eager to learn the numbers behind each estimated that there would be increased out-of-pocket option, but he also knew that nonfinancial information would operating costs of $10,000 per month if a new machine were be just as crucial in making a recommendation. Before the brought online. After five years, the machine would have a call, French sat down at his desk to fully analyze the options. salvage value of $40,000. Although Peregrine did not have the cash readily available to make the purchase, French ASSIGNMENT QUESTIONS believed that with a small amount of cash budgeting and planning, this option would be feasible. 1. Without using any numbers, identify the strengths and weaknesses of the three options identified by French. OPTION 2: FINANCE THE PURCHASE OF A NEW CNC MACHINE Are there any other options French should consider? The company selling the CNC machine also offered a leasing option. The terms of the lease included a down 2. Compute and compare the net present value and payback payment of $50,000 and monthly payments of $2,200 for five period of each option. years. After five years, the equipment could be purchased 3. Make a recommendation for French. for $1. The operating costs and salvage values would be the 4. Rounding to the nearest 1%, at what discount rate does same as option 1, the purchasing option. The company had cash? the necessary cash on hand to make the down payment for the lease. With both the leasing and purchasing options, the company had sufficient space to operate the new equipment, and French believed he had almost all of the right employees in place to execute this plan. OPTION 3: ADD A THIRD SHIFT French and one of his co-investors had extensive experience in the trucking industry and had seen firsthand the effect of utilizing equipment around the clock. French believed adding a third shift could unlock a lot of value at Peregrine, and it could be done at a low cost. Adding a third shift would involve moving several existing employees to work the night shift and would also mean hiring some new employees. Although French believed that in time he may add a full third shift to increase overall capacity, his initial plan was for the night shift to run as a "skeleton crew" with the primary purpose of keeping the CNC machines operational for 24 hours. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his existing shifts. He estimated that adding a third shift would create $12,000 in additional monthly out-of-pocket operating costs, but no new machinery would need to be