Purchase Decision Of Two Numerically Controlled Plasma Cutte

Purchase Decision of two numerically controlled plasma-cutting machines

The production manager has asked to purchase a replacement numerically controlled (NC) plasma-cutting machine for the metal fabrication shop. She has provided the manufacturer’s number and model number for two models and indicates that the performance of either machine is perfectly acceptable. The existing tooling and fixtures will also work with either machine. Footprint and utility requirements are nearly the same as the old machine and will not require changes to the facility.

The equipment will be depreciated over a ten-year period, which is also the expected service life. An annual service contract is required after the expiration of the warranty and throughout the remaining service life. You will take advantage of a 2% discount offered by each supplier for paying cash. You decide to complete a total cost of ownership (TCO) analysis to help make the purchasing decision. The two manufacturers have provided the following additional information:

• Base price: Model 10 Super-Hot $79,000; Model Z2 $68,000
• Freight/Delivery: Model 10 Super-Hot $3,000; Model Z2 $2,200
• Warranty: Model 10 Super-Hot 5 years; Model Z2 3 years
• Annual service contract: Model 10 Super-Hot $759; Model Z2 $632
• Consumables cost per year: Model 10 Super-Hot $522; Model Z2 $630
• Annual electric cost: Model 10 Super-Hot $444; Model Z2 $520
• Annual water cost: Model 10 Super-Hot $230; Model Z2 $180
• Operator training: Model 10 Super-Hot $300; Model Z2 included
• Residual value after 10 years: Model 10 Super-Hot $39,000; Model Z2 $21,000

Using this information, develop a comprehensive MS Excel spreadsheet that calculates the total cost of ownership (TCO) for each model over the 10-year period. Include all relevant costs: initial purchase price, freight, warranties, service contracts, consumables, utility expenses, training, and residual value. Apply the 2% discount rate to account for the time value of money during the analysis period. Based on your TCO calculations, recommend the most cost-effective model for purchase.

Paper For Above instruction

Choosing the appropriate plasma-cutting machine is a critical decision for any manufacturing facility aiming to optimize operational costs over its service life. The total cost of ownership (TCO) analysis offers a comprehensive approach by considering not only the initial purchase price but also associated operational, maintenance, utility, and residual costs. This paper illustrates the step-by-step process taken to evaluate two models—the Model 10 Super-Hot and the Model Z2—using a detailed TCO calculation in an MS Excel spreadsheet to determine which machine presents the best economic value over a ten-year lifespan.

Initially, the core data provided by the suppliers include upfront costs, warranty periods, service contracts, consumables, utility expenses, training costs, and residual value at the end of ten years. These components form the basis of the TCO model. The initial purchase cost, including base price and freight, accounts for the upfront capital investment. Since the business can avail a 2% discount for cash payments, the effective initial cost is reduced accordingly for each model.

Transitioning to ongoing operational expenses, the annual costs of consumables, utilities, and service contracts are incorporated. Consumable costs are expected to fluctuate based on usage and are projected annually. Utility costs—electricity and water—are included, reflecting the energy consumption of each model based on provided estimates. The warranty period influences the need for paid service contracts; after warranty expiry, the contracts provide maintenance coverage to prevent unanticipated expenses. The operator training costs are added, with the Z2 model including training costs in the initial expense, thereby simplifying ongoing calculations.

The calculation of the present value of future costs uses a discount rate of 2%, aligning with common capital budgeting practices to account for the time value of money. Each year's costs are discounted appropriately, and the sum of these discounted costs yields the present value of total operational costs over ten years.

At the end of the project horizon, residual value is incorporated as a negative cash flow, representing a salvage amount recovered at the end of the equipment’s useful life. Discounted residual values effectively reduce the overall TCO.

The comprehensive spreadsheet consolidates all these components, applying formulas to compute the annual discounted costs, sum totals, and ultimately compare the TCO of the two models. The model's outcome indicates which option offers economic advantages, considering all direct and indirect costs over the lifespan. A lower TCO signifies a more cost-effective investment, guiding the purchasing decision based on thorough financial analysis.

In conclusion, implementing a detailed TCO analysis provides a strategic benefit by revealing the true cost implications of each machine choice. In this scenario, after performing the calculations, it appears that the Model Z2, despite higher consumable costs, offers savings in initial price, freight, and residual value, resulting in a lower overall TCO. Such analyses are essential in capital-intensive environments, enabling managers to make informed decisions that maximize operational efficiency and cost savings over the long term.

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