Funding the Future at ABC Welding Background As a new engineering employee of ABC Welding, ABCW, a rm that uses advanced technology welding to weld pressure vessels you have been volunteered to participate in a Resource Planning Group, RPG. There were two reasons for the invitation to join the RPG. First, since you are new to the rm you will likely bring a fresh perspective to the RPG, hence ABCW. Second, after reviewing your college transcript it was noted that you had taken an engineering economics class as part of your education. As a consequence the RPG felt your input would be valuable. Although ABCW has been able to deliver to industry its core product of welded pressure vessels, ABCW is not satised with the quality of the nished product nor the amount of time it takes to deliver the vessels themselves. Management at ABCW is of the opinion that even though the current welding processes are satisfactory, the overall productivity of ABCW is lacking. The option to maintain the current processes in view of the competiveness of the market is increasingly risky. Therefore the focus of the RGP is to be on future welding technology. Specics In particular, the agenda of the RGP folks is to focus on the robotic welding, RW, of the pressure vessels. Even though RPG uses RW, management feels that the promise of this technology has not fully materialized. Consequently, the RPG has a twofold mission. A section of the RPG is to identify new RW technologies that would increase the productivity of ABCWs current productivity. A second section within the RPG is to estimate funding for the new future technology. This second section of the RGP is to help reconcile ABCWs proposed funding scheme with the funding requirements of the new technology. Hence, the RPG is divided into two sections: scope and funding. Since you have an engineering economics background, you are part of the RPG funding section. The funding section is to assume that the scope section RW proposals fulll the functions required by ABCW. ABCW Managements Proposed Funding Scheme This is the funding schedule proposed by ABCW nancial managers: starting at end of year 1, EOY 1, ABCW will deposit $500K into an account that will pay interest at ABCWs cost of capital, 8% APR. However, in order to mitigate the risk to ABCW the nance department requires the 8% APR to be compounded daily. In addition to the initial EOY 1 annual payment, ABCW will deposit an annual amount at the end of each year up to an including EOY 5. The amount of the deposit will decrease by $100K each year from the EOY 1 deposit beginning EOY 2 until EOY 5. In addition for EOY 6 to EOY 10 ABCWs nancial folks are of the opinion that no extra funding should be deposited into this fund because several pieces of existing equipment will be requiring scheduled overalls. RPGs Scope Section Funding Requirements The scope section of the RPG believes that the RW technology required by ABCW will not be available until EOY 11 or eleven years from now. Based on that timing, the scope section also believes that ABCW will need to have $700K on hand to fund EOY 11. In subsequent years from EOY 11 the amount of annual funding required will decrease by 10% each year until EOY 20. At EOY 20 or twenty years from now, ABCW envisions the new technology to be fully operational. Thus the funding requirements for scope section will be fully expended. RPGs Funding Section The funding section of the RPG has the task of bringing reality to ABCW. The funding section is tasked with reconciling the proposed funding scheme from the ABCWs nancial folks (EOY 1 to EOY 5) with the estimated monetary requirements proposed by the RPGs scope section folks. (EOY 11 to EOY 20) Using the proposed ABCW funding scheme along with the RPGs funding requirements, the funding section must decide if the funds generated by deposits in EOY 1 to 5 provide sufficient funds to cover the expense requirements of the future technology beginning EOY 11. The objective of ABCW is to implement the new technology without having to borrow money. *Case Focus Questions/Deliverables* 1) Does the proposed funding scheme from ABCWs nance department cover the cash requirements to implement the new technology on the proposed timeline? a) How much over or under funded is the reconciliation? 2) If there is a shortage, how much funding should be available for EOY 11 to 20 to match both the cash ow timing and the funds available? 3) If there is a surplus, how much more funding would be available for EOY 11 to 20 to match the cash ow timing and funds available? 4) Produce a cash ow diagram showing the 20 year deposit and fund availability cash ows as stated in the problem statement.

5) Some of the members of the RPG funding section wish to take their mandate a bit further. The funding section members think that it might be easier to secure funds if both the ABCW scheme and the RPG funding requirements in terms of what it would cost as of today. Therefore based on the assumption that RPG funding requirement is unchangeable (EOY 11 to 20), the RPG funding section would like to report the future funding needs as an equivalent lump sum. a Use the results of parts 1, 2 and 3 to be sure the funds match.

Another funding section member thinks that it might be easier to secure funding if the monetary requirements were presented in terms of an equivalent annual expenditure. She suggests that the current funding plan proposed the ABCW nance scheme is too complicated. In fact she thinks that ABCW could well afford depositing 150K per year but over a 10 year period.

6) Will this funding scheme work financially? If not, what adjustments could be made to make it work? Are they realistic? (Hint: remember the three necessary factors to calculate the time value of money. ABCW uses the same compounding scheme at any interest rate. All cash ows are annual.) a)Use the results of parts 1, 2 and 3 to be sure the funds match.