BU610 HU Finance and Accounting for Decision Making Project

Description

Quantitative Analysis: Compute and compare the net present value and payback period of each option. Qualitative Analysis: In a 2-3 page report, make a recommendation for French. Be sure to provide a written analysis of the results of your quantitative analysis (do not copy and paste Excel worksheet into your document). Critically analyze both options and support your recommendation with a minimum of 3 academic resources. Deliverables Quantitative Analysis (Excel required): You are required to use the provided Excel workbook to complete the quantitative analysis for this assignment.Qualitative Analysis (Word required): Prepare a 2-3 page summary addressing the required qualitative analysis as noted in the Student Workbook. Your paper is required to be formatted according to APA requirements. Be sure to incorporate key concepts from this unit’s readings and properly cite your references according to APA requirements. Do NOT embed the results of your quantitative analysis in your Word document. You should only reference parts of your quantitative analysis in your written analysis. Your written responses to the qualitative prompts should not to be presented in a question and answer format.

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Peregrine_The
CNC Machine
Decision
Peregrine_The CNC Machine Decision
Option 1: Purchase the CNC Machine with Cash
Year 0
Inflows
Year 1
Year 2
Year 3
Year 2
Year 3
Gross Revenue
Salvage value
Total Inflows
Outflows
Initial purchase
Cost of Goods Sold
Operating Costs
Total Outflows
Overall Cashflow
Net Present Value:
Payback Period
years
Discount Rate
Option 2: Finance the Purchase of the CNC Machine
Year 0
Inflows
Gross Revenue
Salvage value
Total Inflows
Outflows
Initial purchase
Cost of Goods Sold
Operating Costs
Lease payments
$1 payment
Total Outflows
Overall Cashflow
Year 1
Net Present Value:
Payback Period
Discount rate
years
Year 4
Year 5
Year 4
Year 5
Adapted from IMA
IMA EDUCATIONAL CASE JOURNAL VOL. 10, NO. 3, ART. 1, SEPTEMBER 2017
ISSN 1940-204X
Peregrine: The CNC Machine Decision
Tony Bell
Thompson Rivers University
Dr. Andrew Fergus
Thompson Rivers University
INTRODUCTION
It was another sleepless night for Brian French. As a new father, French had grown
accustomed to sleep deprivation, but on this night, it was his business—not his newborn
daughter—that had him tossing and turning. French was the president and co-owner of
Peregrine, a Vancouver-based manufacturer of custom retail displays that were used in
stores, banks, and art galleries. Peregrine had been working on a display for Best Buy
when one of the company’s two computer-numerical-control (CNC) machines broke
down. When the machine went down, French watched progress on the Best Buy job
slow to a halt. Although French had been assured that the CNC machine would be back
up and running within 24 hours, the breakdown revealed a deeper problem: the CNC
machines represented a major bottleneck for Peregrine, and if this machine was down
for more than the promised 24-hour period, the Best Buy job could not be completed on
time, and workers would need to be sent home. French was frustrated by this
predicament and was determined to make the changes necessary to ensure it would not
happen again.
PEREGRINE
In 2012, French left PricewaterhouseCoopers to purchase Peregrine along with two coinvestors. The investment team had been looking for an opportunity to purchase a
company with a successful track record and a founder who was ready for retirement;
Peregrine had fit the bill. Founded in 1977, Peregrine had been operated profitably for
35 years in downtown Vancouver, British Columbia, Canada. In Peregrine, the investors
would be acquiring a company with a history of success and an experienced team that
had expertise in manufacturing a wide array of custom plastic products.
When Peregrine was acquired in 2012, it had employed 6 people and had $600,000 in
sales. Under French’s management, the company had grown to more than 30
employees and more than $6 million in sales by 2016.
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 time—if 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 two viable options to increase capacity:
1. Purchase an additional CNC machine for cash, or
2. Finance the purchase of an additional CNC machine
1
French considered the details of each option, keeping in mind that for long-term projects
he would use a discount rate of 7%.
OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH
Although it would be costly, the idea of adding a third CNC machine appealed to
French. It would provide him peace of mind that if there were a breakdown, jobs would
continue on schedule. French’s preliminary research revealed that the cost of the new
equipment would be $142,000. He also estimated that there would be increased out-ofpocket operating costs of $10,000 per month if a new machine were brought online.
After five years, the machine would have a salvage 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 selling the CNC machine also offered a leasing option. The terms of the
lease included a down payment of $50,000 and monthly payments of $2,200 for five
years. After five years, the equipment could be purchased for $1. The operating costs
and salvage values would be the same as option 1, the purchasing option. The
company had the necessary cash on hand to make the down payment for the lease.
With both the leasing and purchasing options, the company had sufficient space to
operate the new equipment, and French believed he had almost all of the right
employees in place to execute this plan.

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