Please help. Just need the assignment Questions in picture 3 answered. Thanks. (not pictured is discount rate to be used which is 7%)

ualearn.blackbo Panopto Content - 202010-AC-361-007 Chapter 13 Handout 19 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. Chapter 13 Handout ato Content - 202010-AC-361-007 me company na sumicient space couperate 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 employees to work the night shift and would also mean hiring some new employees. Although French believed that in time he may add a full third shift to increase overall capacity, his initial plan was for the night shift to run as a "skeleton crew" with the primary purpose of keeping the CNC machines operational for 24 hours. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his existing shifts. He estimated that adding a third shift would create $12,000 in additional monthly out-of-pocket operating costs, but no new machinery would need to be IMA EDUCATIONAL CASE JOURNAL purchased. Based on his trucking experience, French knew this option would be difficult to execute, as there were major safety and supervision challenges associated with running a night shift. MOVING FORWARD French wanted to get moving on a solution and arranged a conference call with his two co-owners. He knew his co- owners would be eager to learn the numbers behind each option, but he also knew that nonfinancial information would be just as crucial in making a recommendation. Before the call, French sat down at his desk to fully analyze the options. ASSIGNMENT QUESTIONS 1. Without using any numbers, identify the strengths and weaknesses of the three options identified by French. Are there any other options French should consider? 2. Compute and compare the net present value and payback period of each option. 3. Make a recommendation for French. 4. Rounding to the nearest 1%, at what discount rate does leasing produce a higher net present value than paving cash? ualearn.blackbo Panopto Content - 202010-AC-361-007 Chapter 13 Handout 19 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. Chapter 13 Handout ato Content - 202010-AC-361-007 me company na sumicient space couperate 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 employees to work the night shift and would also mean hiring some new employees. Although French believed that in time he may add a full third shift to increase overall capacity, his initial plan was for the night shift to run as a "skeleton crew" with the primary purpose of keeping the CNC machines operational for 24 hours. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his existing shifts. He estimated that adding a third shift would create $12,000 in additional monthly out-of-pocket operating costs, but no new machinery would need to be IMA EDUCATIONAL CASE JOURNAL purchased. Based on his trucking experience, French knew this option would be difficult to execute, as there were major safety and supervision challenges associated with running a night shift. MOVING FORWARD French wanted to get moving on a solution and arranged a conference call with his two co-owners. He knew his co- owners would be eager to learn the numbers behind each option, but he also knew that nonfinancial information would be just as crucial in making a recommendation. Before the call, French sat down at his desk to fully analyze the options. ASSIGNMENT QUESTIONS 1. Without using any numbers, identify the strengths and weaknesses of the three options identified by French. Are there any other options French should consider? 2. Compute and compare the net present value and payback period of each option. 3. Make a recommendation for French. 4. Rounding to the nearest 1%, at what discount rate does leasing produce a higher net present value than paving cash