Introduction

It was another sleepless night for Brian French. As a new father, French had grown accustomed to sleep deprivation, but on this night, it was his business$-$not his newborn daughter$-$that had him tossing and turning. French was the president and co$-$owner of Peregrine, a Vancouver$-$based manufacturer of custom retail displays that were used in stores, banks, and art galleries $($Exhibit $1).$ Peregrine had been working on a display for Best Buy when one of the company's two computer$-$numerical$-$control $($CNC$)$ machines broke down $($Exhibit $2).$ When the machine went down, French watched progress on the Best Buy job slow to a halt. Although French had been assured that the CNC machine would be back up and running within $24$ hours, the breakdown revealed a deeper problem: the CNC machines represented a major bottleneck for Peregrine, and if this machine was down for more than the promised $24-$hour period, the Best Buy job could not be completed on time, and workers would need to be sent home. French was frustrated by this predicament and was determined to make the changes necessary to ensure it would not happen again.

Peregrine

In $2012,$ French left PricewaterhouseCoopers to purchase Peregrine along with two co$-$investors. The investment team had been looking for an opportunity to purchase a company with a successful track record and a founder who was ready for retirement; Peregrine had fit the bill. Founded in $1977,$ Peregrine had been operated profitably for $35$ years in downtown Vancouver, British Columbia, Canada. In Peregrine, the investors would be acquiring a company with a history of success and an experienced team that had expertise in manufacturing a wide array of custom plastic products.

When Peregrine was acquired in $2012,$ it had employed $6$ people and had $$600,000$ in sales. Under French's management, the company had grown to more than $30$ employees and more than $$6$ million in sales by $2016.$

The CNC Machine Decision

When the CNC machine broke down, it was a wake$-$up call for French. The production line was dependent on both CNC machines working full time$-$if they slowed down or needed repair, the business suffered. French believed the key to relieving this bottleneck would be increasing capacity. It not only would prevent downtime but also would allow the company to take on new business. If capacity increased, French estimated that sales revenues would rise by at least $$50,000$ per month due to unmet demand and increased efficiency. The company's margins on the additional revenues were expected to be $35\%.$ French saw three viable options to increase capacity:

Purchase an additional CNC machine for cash,

Finance the purchase of an additional CNC machine, or

Add a third shift $($a night shift$)$ to better utilize the two CNC machines Peregrine already owned.

French considered the details of each option, keeping in mind that for long$-$term projects he would use a discount rate of $7\%.$

Option $1$: Purchase a New CNC Machine with Cash

Although it would be costly$,$ the idea of adding a third CNC machine appealed to French. It would provide him peace of mind that if there were a breakdown, jobs would continue on schedule. French's preliminary research revealed that the cost of the new equipment would be $$142,000.$ He also estimated that there would be increased out$-$of$-$pocket operating costs of $$10,000$ per month if a new machine were brought online. After five years, the machine would have a salvage value of $$40,000.$ Although Peregrine did not have the cash readily available to make the purchase, French believed that with a small amount of cash budgeting and planning, this option would be feasible.

Option $2$: Finance The Purchase of a new CNC Machine

The company selling the CNC machine also offered a leasing option. The terms of the lease included a down payment of $$50,000$ and monthly payments of $$2,200$ for five years. After five years, the equipment could be purchased for $$1.$ The operating costs and salvage values would be the same as option $1,$ the purchasing option. The company had 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 severa