INSY 3600 - Engineering Economy Case Study1 National Parts, Inc., an auto-parts manufacturer, is considering purchasing a rapid prototyping system to reduce prototyping time in automobile parts manufacturing. An outside consultant has been called in to estimate the initial hardware requirement, installation costs and annual cost. He suggests the following:

Prototyping equipment: $187,000.

Installation fee: $10,000.

Software: $15,000.

Site preparation: $20,000.

Maintenance: $36,000 per year.

Resin: liquid polymer consumption of 0.1 gallons per unit at $350 per gallon. The expected life of the system is six years with an estimated salvage value of $30,000. The proposed system classified as a seven-year MACRS property. National Parts estimates the unit price in $61.50 and the estimation of the demand is shown in the following table.

Years [units] 1 2 3 4 5 6 Demand 4500 4700 5000 5000 5000 5000 The firms expected marginal tax rate over the next six years will be 21%. The firms interest rate is 20%.

a) (45 points) What is the NPV of the investment? Do you accept this project?

b) (20 points) If the company could borrow $100,000 of the initial investment at 7% (annual effective rate) that will be paid in five installments, how would this change the NPV calculation? Do you recommend getting the loan?

c) (25 points) Perform sensitive analysis on +/- 20% changes (-20%, -15%, , 0%, , 15%, 20%) in initial investment, unit price, demand (for each year), unit variable cost, fixed cost, and salvage value from part b. Graph your data, and identify the key variables.

d) (10 points) What should be the break-even unit price where the company NPV is zero?