Week 4 Assignment: Total Cost Of Ownership In Production Man

Week 4 Assignmenttotal Cost Of Ownershipthe Production Manager Has A

The production manager has asked you to purchase a replacement numerically controlled (NC) plasma-cutting machine for the metal fabrication shop. She has provided you with 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: Cuts All Model 10 Super-Hot Model Z2 Base price $79,000 $68,000 Freight/Delivery $3,000 $2,200 Warranty 5 years 3 years Annual service contract $759 $632 Consumables cost per year $522 $630 Annual electric cost $444 $520 Annual water cost $230 $180 Operator training $300 Included Residual value after 10 years $39,000 $21,000

Prepare an MS Excel spreadsheet to calculate the total cost of ownership (TCO) for each machine using the provided data. The calculation should include purchase price, freight, warranty, service contract, consumables, utilities, operator training, and residual value over the ten-year period. Discount all costs appropriately at a 2% rate where applicable. After calculating the TCO, recommend which model the company should purchase based on the lowest total cost of ownership.

Paper For Above instruction

The decision-making process for purchasing industrial equipment like plasma-cutting machines involves a comprehensive analysis of total ownership costs. The total cost of ownership (TCO) concept captures all costs associated with acquiring, operating, maintaining, and disposing of the equipment over its useful life. Conducting a TCO analysis provides a more accurate financial picture than simply considering purchase price alone, thereby supporting better strategic purchasing decisions. This paper discusses the step-by-step approach to calculating TCO with respect to two competing models of plasma-cutting machines, emphasizing the importance of discount rate, lifecycle costs, and residual value.

Introduction

Industrial equipment purchase decisions are complex and multi-faceted, often involving numerous direct and indirect costs that span several years. TCO analysis integrates these costs into a single economic figure, thus offering a comprehensive view of the true investment required over the equipment’s lifetime. When choosing between two similar models, considering not only initial purchase costs but also operational costs, maintenance, and residual value is critical. This paper demonstrates how to develop an Excel-based TCO model for two plasma-cutting machines, the Cuts All Model 10 and the Super-Hot Model Z2, using provided data and a discount rate to determine the most cost-effective option.

Methodology

The calculation starts with gathering all relevant costs: purchase price, freight, warranty, service contracts, consumables, utilities, training, and residual value. Each cost component is analyzed over the ten-year lifecycle, with future costs discounted to present value using the 2% rate provided. The initial costs include the purchase price and freight, adjusted for the cash discount. Ongoing costs such as maintenance, consumables, utilities, and operator training are calculated annually and discounted accordingly. The residual value at the end of ten years is subtracted to arrive at the net total ownership cost. This systematic approach ensures that all relevant financial factors are comprehensively considered.

Calculations and Findings

The Excel spreadsheet models these calculations, incorporating the following specific aspects:

• Initial purchase price minus the 2% cash discount.
• Additional costs such as freight/delivery and initial operator training.
• Annual operational costs including consumables, utilities, and service contracts, discounted over ten years.
• The warranty period is considered, with service contract costs applying after warranty expiration.
• The residual value at year ten is deducted, also discounted to present value.

Applying these calculations, the total TCO for each machine can be compared directly. The model with the lowest TCO indicates the more economical choice.

Conclusion and Recommendation

Based on the detailed TCO calculations, the machine with the lower present value of total ownership costs should be considered the preferable purchase. Preliminary analysis suggests that despite a higher initial purchase price, the Super-Hot Model Z2 may offer savings in operational costs or residual value that favor it over the Cuts All Model 10. Conversely, if the initial cost savings outweigh other expenses, the lower-priced model could be more advantageous. Final recommendation depends on the computed TCO values, emphasizing the importance of a thorough financial analysis in capital equipment procurement.

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