Posted: March 2nd, 2014

Engineering Economic Analysis

Case Study I

Engineering Economic Analysis (11^th ed.) by Newnan, Lavelle, and Eschenbach, Oxford University Press, 2012, ISBN 978-0-19-977804-1.

.Background (for both case studies)

 

Dayton Metal Corporation (DMC), a medium-sized manufacturer of fabricated metal parts, is considering whether to enter the competition to become a supplier of transmission housings for Dayton Power & Light (DP&L).  To compete, DMC must design a new fixture for the production process and purchase a new forge, which would cost $125,000.  If DMC wins the competition, it may be able to sell as many as 2,000 units per year to DP&L for $50 each; variable production costs, such as direct labor and direct material costs, are estimated to be $15 per unit.  Fixed costs are estimated to be $10,000 per year.  DMC expects that the proposed project will have a life of about 5 years.  The initial investment can be depreciated on a MACRS basis over a 7-year period, and the marginal income tax rate is 40%.  At the end of 5 years, the forge is expected to have a market value equal to 32% of its original cost.  Based on this information, the engineering and marketing departments at DMC have prepared the cash flow estimates shown in the table on the next page.

 

 

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Tasks

 

Provide your responses to the following three items in a Word document to be submitted electronically through Isidore.  Additionally, please submit the Excel file used to generate the spiderplot and tornado diagram.

 

a)      Assuming a MARR of 15%, determine the net present worth (NPW) of the project.

b)      Perform a sensitivity analysis which includes the following variables:  unit price, demand, variable cost, fixed costs, and salvage value.  Vary each variable by +50% in 5% increments.  Develop both a spiderplot and a tornado diagram’ copy and paste the respective plots into the Word document.

c)      For each of the five variables, determine whether the NPW is very sensitive, fairly sensitive, or relatively insensitive to changes.  Discuss the results and the impact on DMC’s decision to pursue the project.

 

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After-Tax Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 

Case Study II

 

 

Background (for both case studies)

 

Dayton Metal Corporation (DMC), a medium-sized manufacturer of fabricated metal parts, is considering whether to enter the competition to become a supplier of transmission housings for Dayton Power & Light (DP&L).  To compete, DMC must design a new fixture for the production process and purchase a new forge, which would cost $125,000.  If DMC wins the competition, it may be able to sell as many as 2,000 units per year to DP&L for $50 each; variable production costs, such as direct labor and direct material costs, are estimated to be $15 per unit.  Fixed costs are estimated to be $10,000 per year.  DMC expects that the proposed project will have a life of about 5 years.  The initial investment can be depreciated on a MACRS basis over a 7-year period, and the marginal income tax rate is 40%.  At the end of 5 years, the forge is expected to have a market value equal to 32% of its original cost.  Based on this information, the engineering and marketing departments at DMC have prepared the cash flow estimates shown in the table on the next page.

 

 

Tasks

 

DMC has decided to evaluate the project using the Monte Carlo technique with 1,000 iterations.  All cash flow estimates in the table on the next page remain the same except for three variables.

a)      Assume that the demand has the following discrete distribution:  20% probability of being 1600 units per year, 60% probability of being 2000 units per year, and 20% probability of being 2400 units per year.

b)      Assume that the unit price has a triangular distribution in which the lowest price is $48, the most likely price is $50, and the highest price is $53.

c)      Assume the salvage value is uniformly distributed between $30,000 and $50,000.

 

Determine the expected value and standard deviation for the NPW of the project.  Include a histogram and a plot of the NPW cumulative average versus number of iterations (to show stabilization).  Discuss the results and the impact on DMC’s decision to pursue the project.

Provide your responses in a Word document to be submitted electronically through Isidore.  Additionally, please submit the Excel file used to generate your responses.

 

 

 

After-Tax Cash Flow