Automotive Parts Corp is an automotive parts supplier for major name brand automotive manufacturers. APC uses a combination of line staff, tool and die machines and injection molding to build the engine parts they supply. Over the years APC has upgraded the plant floor to increase production including adding conveyor belts to reduce the need for manual labour. The machines, however, have not been upgraded.

Large automotive manufacturers set standards and threshold on the quality and precision of parts. If the automotive manufacturer receives defective parts, they are either returned to APC or thrown out and replaced with new ones. APC expenses the defective and discarded parts at the end of the year and currently experiences 6 parts in every 100 shipments as defective. APC currently makes 200 shipments of parts a year. The total defective part expense is currently running at $600 a year at year end.

APC is contemplating to purchase and install new machines. The new machines will reduce the number of defective parts and break down much less. The machines cost $17,500 and will have annual maintenance costs of $900 paid at the end of the year. APC estimated the machines will last 5 years. The plant manager recommends this particular brand of new machines because she estimates it will reduce the defective parts to 3 in every 100 shipments.

APC currently has an Equipment Breakdown insurance policy for the mechanical breakdown of their machines that has an annual premium of $10,000 a year, paid at the beginning of the year. The insurance company is willing to reduce the premium once the new machines are installed to $5000 a year.

The plant staff will have to undergo a one-time specialized training workshop on the new machines and will cost the firm $1000 at the time of install.

1. What is the total beginning of year cash flow at T=1?
2. What are the maintenance costs each year?
3. What is the lower retention each year?