Question 2 (25 marks)

During your first month as an employee at ABC Industries (a large drill-bit manufacturer), you are asked to evaluate alternatives for producing a newly designed drill bit on a turning machine. The same task was posed to a previous employee who could not finish the analysis, but she has given you the following information. An old turning machine valued at $400,000 stored (in the warehouse) that can be modified for the new drill bit. At the same time, the in-house technicians have given an estimate of $60,000 to modify this machine, and they assure you that they will have the machine ready before the project start date (although they have never done any modifications of this type). It is hoped that the old turning machine will be able to meet production requirements at full capacity. An outside company, XYZ Inc., made the machine seven years ago and can easily do the same modifications for $90,000. The cooling system used for this machine is not environmentally safe and would require some disposal costs. XYZ Inc. has offered to build a new turning machine with more environmental safeguards and higher capacity for a price of $500,000. XYZ Inc. has promised this machine before the startup date and is willing to pay any late costs. Your company has $100,000 set aside for the start-up of the new product line of drill bits. Using engineering economic analysis procedure for this situation,

(a) Define the problem. (4 marks)

(b) List three key assumptions. (5 marks)

(c) List alternatives facing ABC Industries. (6 marks)

(d) Select a criterion for evaluation of alternatives. (3 marks)

(e) Discuss how nonmonetary considerations may impact the selection. (7 marks)

Rubrics and Marking: Marks will be given based on the understanding of problems and correct answer with appropriate explanations. It tests your ability in applying the knowledge learnt to practical questions/issues. You will get the points if your answers are logical with supporting discussions and/or supporting facts.