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 timeif 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. MOVING FORWARD French wanted to get moving on a solution and managed a confonce call with his two co-owner. He knew his co- We would be car in care the women behin each caption, but he als knew that hinancial information would he just an crucial in making a recommendation. Before the call, French sat down at his deak to fully analyse the optime ASSIGNMENT QUESTIONS 1. Without using any number, identify the mength and cake cof the three options identified by French Are there any other apties French should consider? 2. Compute and compare the present value and paytack perind of cach option 2 Make a commentation for French & Rounding to the nearest 19, what discount rate docx Icmning produce a higher rct pexent value than paying OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH Although it would be coatly the idea of adding a third CNC machine appealed to French. It would provide him peace of mind that if there were a becakdown.jobs would creatinue in schedule. French's preliminary and revealed that the cent of the new cient would be $112.000. He ale stimated that there would be increased on-of-pocket perating costs of $10,000 per month if a new machine we bragt caline. After five years, the machine would have a calage 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 cling the CNC machine le offered a kening option. The terms of the lease included a down payment of $50,000 and monthly payments of $2,200 for five years After five year, the equipment could be purchased for $1. The operating costs and salvage values would be the came an option the purchasing option. The company had the necessary card on hand to make the down payment for the case. With both the leasing and purchasing options the company had sufficient space to operate the new quipment, and French believed he had almost all of the right employees in place to escate din plan. OPTIONADO A THIRD SHIFT French and one of his co-investees had extensive experience in the fucking industry and had sconfirhand the effect of utilizing pipe mund the clock French believed addig a thind shit could lock a lot of value at Peregrine, and it could be done at a low cont. Adding a third shift would imale mering several cxisting employees to week the night shift and would mean hiring me how employee Although French believed that in time he may add a full third shift to increase overall capacity, his initial plan was far the night shift transakce with the primary purpose of keeping the CNC machine operational fie 24 hour. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his cxisting shifte. He cated that adding a third lift would create $12,000 in additional monthly cut-of-pecker perating cuts, but now machinery would need to be ABOUT IMA INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA, the actions and financial policia in business, in of the largest and most reported an action frecuencively advancing the management conting paleise Globally, IMA ports the poole tag reach the CMA Certified Management program, cuing education, taking and advocacy of the highest chical basic practice. IMA has a pobal network of me than 5,000 members in 140 countries and policia and dont chapen. Headquared in Novak, NL, USA, IMA provides clied wavice through it for yolali The America, filiis pead Middle E.India. Fomeinimas IMA, please visit www.im 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 timeif 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. MOVING FORWARD French wanted to get moving on a solution and managed a confonce call with his two co-owner. He knew his co- We would be car in care the women behin each caption, but he als knew that hinancial information would he just an crucial in making a recommendation. Before the call, French sat down at his deak to fully analyse the optime ASSIGNMENT QUESTIONS 1. Without using any number, identify the mength and cake cof the three options identified by French Are there any other apties French should consider? 2. Compute and compare the present value and paytack perind of cach option 2 Make a commentation for French & Rounding to the nearest 19, what discount rate docx Icmning produce a higher rct pexent value than paying OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH Although it would be coatly the idea of adding a third CNC machine appealed to French. It would provide him peace of mind that if there were a becakdown.jobs would creatinue in schedule. French's preliminary and revealed that the cent of the new cient would be $112.000. He ale stimated that there would be increased on-of-pocket perating costs of $10,000 per month if a new machine we bragt caline. After five years, the machine would have a calage 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 cling the CNC machine le offered a kening option. The terms of the lease included a down payment of $50,000 and monthly payments of $2,200 for five years After five year, the equipment could be purchased for $1. The operating costs and salvage values would be the came an option the purchasing option. The company had the necessary card on hand to make the down payment for the case. With both the leasing and purchasing options the company had sufficient space to operate the new quipment, and French believed he had almost all of the right employees in place to escate din plan. OPTIONADO A THIRD SHIFT French and one of his co-investees had extensive experience in the fucking industry and had sconfirhand the effect of utilizing pipe mund the clock French believed addig a thind shit could lock a lot of value at Peregrine, and it could be done at a low cont. Adding a third shift would imale mering several cxisting employees to week the night shift and would mean hiring me how employee Although French believed that in time he may add a full third shift to increase overall capacity, his initial plan was far the night shift transakce with the primary purpose of keeping the CNC machine operational fie 24 hour. He believed that adding a third shift would produce the same increase in revenue as adding a new CNC machine to his cxisting shifte. He cated that adding a third lift would create $12,000 in additional monthly cut-of-pecker perating cuts, but now machinery would need to be ABOUT IMA INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA, the actions and financial policia in business, in of the largest and most reported an action frecuencively advancing the management conting paleise Globally, IMA ports the poole tag reach the CMA Certified Management program, cuing education, taking and advocacy of the highest chical basic practice. IMA has a pobal network of me than 5,000 members in 140 countries and policia and dont chapen. Headquared in Novak, NL, USA, IMA provides clied wavice through it for yolali The America, filiis pead Middle E.India. Fomeinimas IMA, please visit www.im