ONLY FILL OUT ALL OF THE HIGHLIGHTED YELLOW BOXES IN THE PICTURE, IF YOU DONT DO THIS CORRECTLY IT WILL BE THMBS DOWN. INCLUDE ALL formulas used as well. thanks

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:

$1.$ Purchase an additional CNC machine for cash,

$2.$ Finance the purchase of an additional CNC machine, or

$3.$ Add a third shift $($a night shift$)$ to better utilize the two

CNC machines Peregrine already owned.

IMA EDUCATIONAL CASE JOURNAL $1$ VOL. $10,$ NO$.3,$ ART. $1,$ SEPTEMBER $2017$

ISSN $1940-204$X

Peregrine: The CNC Machine Decision$O_1$

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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 several existing