The following is a comparison of the cost structure of a conventional manufacturing technology (CMT) system with that of a flexible manufacturing system (FMS) at one U.S. firm:

	Most likely estimates
	CMT	FMS
Number of part types	3,000	3,000
Number of pieces produced/year	544,000	544,000
Variable labor cost/part	$2.15	$1.30
Variable material cost/part	$1.53	$1.10
Total variable cost/part	$3.68	$2.40
Annual overhead costs	$3.15 M	$1.95 M
Annual tooling costs	$470,000	$300,000
Annual inventory costs	$141,000	$31,500
Total annual fixed operating costs	$3.76 M	$2.28M
Investment	$3.5 M	$10 M
Salvage value	$0.5 M	$1 M
Service life	10 years	10 years
Depreciation methods (MACRS)	7 years	7 years

a. The firms marginal tax rate and MARR are 40% and 15%, respectively. Determine the incremental cash flow (FMS-CMT) based on the most likely estimates.

b. Management feels confident about all input estimates for the CMT. However, the firms does not have any previous experience in operating an FMS. Therefore, many of the input estimates for that system, except the investment and salvage value, are subject to variation. Perform a sensitivity analysis on the projects data, varying the elements of the operating costs. Assume that each of these variables can deviate from its base-case expected value by +/- 10%, +/- 20 % and +/- 30 %.

c. Prepare sensitivity diagrams and interpret the results.

d. Suppose that the probabilities of the variable material cost and the annual inventory cost for the FMS are estimated as follows:

Material cost
Cost per part	Probability
$1.00	0.25
$1.10	0.30
$1.20	0.20
$1.30	0.20
$1.40	0.05

Inventory cost
Annual Inventory cost	Probability
$25,000	0.10
$31,000	0.30
$50,000	0.20
$80,000	0.20
$100,000	0.20

What are the best and the worst cases of incremental PW?