Bay Area Innovations

As stated on their website:

Bay Area Innovations is Tampa's full service engineering product design firm dedicated to providing companies with quality engineering design services in an economical and efficient manner. From project definition to product design, Bay Area Innovations possesses the experience necessary to effectively solve your design and manufacturing puzzle.

Today, Bay Area Innovations currently employs 8 - 10 persons with expertise in Mechanical Engineering Design, Electrical Engineering Design, Graphic Design, and Software/Website Coding. In January of 2012, Bay Area Innovations signed a 3-year lease on a 3000 square foot facility located in the heart of Tampa. Our goal is to recruit innovative and talented individuals who are motivated by success of the company and its customers. Our team works closely together in a "think tank" atmosphere, to develop solutions that are effective for our customers.

A team of USF students has been hired through the IMSE Industry Consortium to estimate the initial hardware requirement and installation costs for the purchase of a new rapid prototyping system to reduce prototyping time for form, fit, and function applications in aerospace parts manufacturing for BAI. The teams estimate is as shown in Table 1.

The expected life of the system is six years with an estimated salvage value of $30,000. The proposed system is classified as a five-year MACRS property. A group of computer consultants must be hired to develop customized software to run on the system. Software development costs will be $20,000 and can be expensed during the first tax year. The new system will reduce prototype development time by 75% and material waste (resin) by 25%. This reduction in development time and material waste will save the firm $314,000 and $35,000 annually, respectively.

Prototyping equipment	$ 187,000.00
Posturing apparatus	$ 10,000.00
Software:	$ 15,000.00
Maintenance:	$ 36000 per year by the equipment manufacturer
Resin:	Annual liquid polymer consuption of 400 gallons at $350 per gallon
Site preparation	Some facility changes are required for the installation of rapid prototying system(e.g.,certain liquid resins contain a toxic substance,so the work are be well ventilated).

Table 1

The firms expected tax rate over the next six years will be 40%. The firms cost of equity is 20%.

(a) Assuming that the entire initial investment will be financed from the firms returned earnings (equity financing), determine the after-tax cash flows over the life of the investment. Compute the NPV of this investment.

(b) Assuming the entire initial investment will be financed through a local bank at an interest rate of 13% compounded annually, determine the net after-tax cash flows for the project. Compute the NPV of the investment.

(c) Suppose that a financial lease option is available for the prototype system at $62,650 per year, payable at the beginning of the year. Compute the NPV of the investment with lease financing.

Select the best option then perform a sensitivity analysis by varying resin costs, using the data table function in MS Excel, to determine the resultant impact on the projects NPV. Assume that resin cost per gallon can deviate from its base-case expected value by +/-10 %, +/-20%, and +/-30%. Interpret the results of your sensitivity analysis.

Perform a scenario analysis on the project's NPV, using the scenario manager in MS Excel, by comparing the base case to the following two scenarios then interpret the results:

	Worst case Scenario	Best case Senario
Resin cost per gallon	30%	-30%
Savings from reduction in development time	-20	20
Tax Rate	42%	35%