Question
Your company, Performance Machines produces a variety of specialized components for turbines and industrial power transmission systems, including large springs. While you have automatic machines
Your company, Performance Machines produces a variety of specialized components for turbines and industrial power transmission systems, including large springs. While you have automatic machines capable of making spring less than 0.375 gage, anything larger currently must be made by hand. At a trade show you identified a machine that is capable of automating spring production for gages between 0.375 to 0.75. The machine will cost $150,000 and will require another ($12,000 ) in commissioning costs. Using this automatic machine is expected to decrease costs by ($46,000 ) annually, is expected to last for 10 years, should be depreciated on a 7 year MACRS schedule, and will have a salvage value ($1,000.)
- Your firm uses a MARR of 10% and has a marginal tax rate of 35%. Develop an income statement and cash flow statement for this machine. Should this project be accepted or rejected?
- When you were developing your proposal you spoke with the business capture team. They informed you that while your understanding of the status quo is accurate, the primary customers using large gage springs frequently release requests for quotes to reduce component costs. By being able to produce the springs cheaper, you might be able to capture a larger segment of the business, however competitors might also be able to reduce your market share. They have provided the probabilities below. Should this project be accepted or rejected under the new criteria?
Probability | Revenue Change | Scenario |
0.20 | -40% | Loss of Market Share |
0.26 | 0% | Maintain Market Share |
0.20 | +10% | Capture New Project A |
0.20 | +10% | Capture New Project B |
0.04 | +20% | Capture New Project A & B |
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