Skyhawk Corporation $($Skyhawk$,$ or $$the Company$)$ has been designing and building commercial $($both freight

and passenger$)$ aircraft for the past $80$ years. Skyhawk's safety record is unparalleled. This fact is well known by

their customers, and Skyhawk has built a great reputation as a result. Skyhawk has a long tradition of

manufacturing all parts and assembling them in their own plants with their own workers. Airplanes take

approximately six months to complete and test for quality and safety before they can be delivered to customers.

Customers order airplanes at least one year in advance of the anticipated delivery date. Most of Skyhawk's

orders for new airplanes occur in the last six months of each year as customers put new airplanes into service.

The Company increases replacement parts inventories the first two quarters each year to meet demand for

replacement parts just in time for customers to complete overhauls on existing airplanes before the year's

summer vacation and winter holiday travel and shopping seasons begin. Customers order replacement parts for

aging airplanes as needed. To assure aging airplanes are properly maintained and repaired, Skyhawk also

provides advisory, upgrade, repair, and maintenance services on customers' aircraft already in service.

The market for freight aircraft has grown significantly as more and more retail shoppers purchase goods online

and have them shipped. Skyhawk has attempted to keep up with customer orders, but management estimates

that demand for Skyhawk planes will outpace production in about six months. Skyhawk can sell every aircraft it

manufactures and could also sell more services if space allowed. If management cannot increase production,

they will lose orders to foreign competitors. Skyhawk's Chief Financial Officer has requested the finance

department $($you$)$ to prepare a financial analysis of five alternatives management is considering to correct the

impending shortfall in production. Your task is to project relevant cash flows for each alternative, apply capital

budgeting analysis, and recommend the alternative$($s$)$ that will provide the best return on investment.

Alternative $1)$ Add night and weekend shifts to increase production to $24$ hours$/350$ days each year.

Management expects to invest $$5$ million in upfront costs for new hiring, employee training, employee benefits,

and employee retention programs to expand the workforce from $16$ hour$/250$ day to $24$ hour$/350$ day

production. Due to a steep learning curve, new employees are not considered fully trained until at least one year

of experience. Management expects this alternative would increase overall aircraft production by only $10\%$ the

first year. After the first year, production should increase by $30\%$ each year thereafter.

Alternative $2)$ Outsource any components not critical for flight, freight, or passenger safety. Management has

already spent $$1$ million to prepare documentation, schematics, prototypes and contracts to prepare for

outsourcing. Management expects to invest another $$7$ million in upfront costs working with outside vendors to

outsource non$-$critical parts production. Due to a steep learning curve, outsourced firms are not considered fully

certified until at least one year of experience. Management expects this alternative to increase overall aircraft

production by only $5\%$ the first year. After the first year, production should increase by $10\%$ each year thereafter.

Management is willing to budget up to $$100,000$ per month in new transportation costs to package and

transport parts to Skyhawk's existing production facility just in time.

Alternative $3)$ Move production of any components not critical for flight, freight, or passenger safety to a

leased facility without expanding night and weekend shifts. For this alternative, management expects to invest

$$15$ million to lease a new facility, redesign operations, and move all parts production and inventories to the new

facility. Management is willing to budget up to $$200,000$ per month in additional overhead $($lease$,$ utilities,

insurance, etc.$)$ and $$50,000$ per month in new transportation costs to package and transport parts to Skyhawk's

existing production facility just in time. This alternative would allow Skyhawk to add one new production line

representing a $10\%$ increase in production the first year and a $20\%$ increase in production each year thereafter.

$1$ of $2$ All rights reserved.

Alternative $4)$ Build a new facility on site to expand parts production and capacity without expanding night

and weekend shifts. Skyhawk would move its parts manufacturing, advisory, maintenance, and repair services

from its existing facility and increase its aircraft upgrade services. Management expects a new facility design and

subsequent construction and moving costs to be $$40$ million and additional fixed overhead costs of $$100,000$ per

year, but a redesigned production process resulting from new additional space would allow Skyhaw