Question 1

Alpha Engineering Ltd. is considering the purchase of a new cnc. machine tool to replace four old capstan lathes. The new machine will cost 150,000 and is expected to last five years, after which it is expected to realise a scrap value of 10,000.

Additional dedicated tooling for the new machine will cost a further 25,000. A maintenance contract will be taken out to cover the machine at a cost of 10,000 per annum. The maintenance of the additional dedicated tooling will be done in-house at an estimated cost of 5,000 per year. A cnc. programmer/operator will be recruited at a cost of 20,000 per year.

The benefits expected from the new cnc. machine will include the scrap value of the old machines, which is expected to be 5,000 each. The wages of four capstan operators of 17,000 per annum each plus the cost of a maintenance fitter at 18,000 per annum can also be considered as a benefit. A further saving of 10,000 per year in reduced scrap/rework costs should also be realised. If the firms cost of capital is 10%;-

1) Draw the cash flow forecast.

2) Evaluate the proposed investment using the following techniques;-

Tutorials 9 and 10 (already completed)

a) Payback

b) Return on Investment

c) Net Present Value

d) Discounted Payback

e) Internal Rate of Return

Tutorial 11

f) Capital Back

3) Carry out a Sensitivity Analysis at the 20% level on ;-

a) Capital,

b) Annual savings,

c) Duration.