Case Study Engineering Economic Analysis 11th Ed By Newnan L

Case Study Iengineering Economic Analysis11th Ed By Newnan Lavelle

Case Study I Engineering Economic Analysis (11th ed.) by Newnan, Lavelle, and Eschenbach, Oxford University Press, 2012, ISBN . . 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.

Paper For Above instruction

The evaluation of engineering economic projects is vital for manufacturers like Dayton Metal Corporation (DMC) to ensure profitable investment decisions. This case study explores the financial feasibility of DMC entering a competitive market segment to supply transmission housings for Dayton Power & Light (DP&L). Key considerations include initial investments, operational costs, revenue projections, taxes, depreciation methods, and sensitivity analysis to assess the robustness of the project under variable conditions.

Part A: Net Present Worth Calculation

To determine the Net Present Worth (NPW) of the project, we first compile and analyze the cash flows over the project lifespan, using a Minimum Attractive Rate of Return (MARR) of 15%. The initial investment comprises a $125,000 cost for designing a new fixture and purchasing a forge, which can be depreciated on a MACRS basis over seven years, with a salvage value at the end of five years representing 32% of the original cost.

Annual revenues are derived from selling up to 2,000 units at $50 per unit, totaling $100,000 yearly. Variable costs are estimated at $15 per unit, amounting to $30,000 annually, with fixed costs at $10,000 per year. The depreciation expense calculated according to MACRS affects taxable income, and income taxes are applied at a 40% rate. Using these data, the project's cash flows are adjusted for depreciation, taxes, and salvage value to compute the annual net cash flow.

Specifically, in Year 0, the initial outlay of $125,000 is recorded. For Years 1 through 5, the net cash flows include operating cash flows derived from net income plus depreciation (a non-cash expense), and the salvage value at the project's end adds to Year 5's cash flow after tax calculations on salvage gains, if any. Discounting these cash flows at 15% yields the NPW, which indicates whether the project adds value to DMC or not. A positive NPW suggests a financially viable investment.

Part B: Sensitivity Analysis and Visual Tools

Sensitivity analysis assesses how variations in key variables influence the project's NPW, helping identify the most critical factors affecting profitability. Variables examined include unit price, demand, variable costs, fixed costs, and salvage value. Each variable is increased by 50% in 5% increments, producing a series of NPW results.

Two visual tools are used to interpret sensitivity: spiderplots and tornado diagrams. The spiderplot illustrates how the NPW fluctuates with each variable, highlighting the range of possible outcomes. The tornado diagram ranks variables by their impact magnitude, aiding decision-makers in identifying which variables most significantly affect project viability.

Part C: Sensitivity Classification and Decision Implications

Each variable's sensitivity level—very sensitive, fairly sensitive, or relatively insensitive—is determined based on the extent of impact on NPW. For instance, if a 50% change in demand causes a substantial shift in NPW, demand is deemed very sensitive. Conversely, if fixed costs lead to minor NPW variations, they are considered relatively insensitive.

Understanding these sensitivities guides DMC in risk management and strategic planning. Variables with high sensitivity require careful forecasting, contingency plans, or contractual safeguards. Recognizing that demand and unit price are highly influential, DMC might focus on marketing strategies and flexible production capabilities to mitigate risks. Ultimately, the sensitivity analysis informs whether to proceed with the project, adjust parameters to improve margins, or abandon the initiative if risks outweigh benefits.

Conclusion

Effective application of economic analysis techniques like NPW calculation and sensitivity assessments enables manufacturing firms to make informed investment decisions. For DMC, the project can be profitable, provided that market conditions remain favorable and sensitivities are managed appropriately. The comprehensive evaluation underscores the importance of integrating financial metrics with strategic risk analysis to foster sustainable growth and maximize shareholder value.

References

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