take on the role of a senior member of the finance team assigned to lead the
investment committee of a health care equipment manufacturer. Your team is evaluating a “make-versus-buy”
decision that has the potential to improve the company’s competitiveness, but which requires a significant
capital investment in new equipment. The assignment is organized into two parts:
Part A: Data calculations based on the information in the scenarios
Part B: Recommendations based on the calculations
Opportunity Details
The new equipment would allow your company to manufacture a critical component in-house instead of buying
it from a supplier. This capability would help you stabilize your supply chain which has suffered from some
irregularities and quality issues in the past. It could also positively impact profitability through the absorption of
fixed costs since this new machine will have plenty of excess capacity. There may even be a possibility that the
company could leverage this capability to create a new external revenue stream by providing services to other
companies.
The company has been growing steadily over the past 5 years, and the financials and prospects look good.
Your CEO has asked you to run the numbers. After doing some digging into the business, you have gathered
information on the following:
JWI 530: Financial Management I
Assignment 2
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JWI 530 Assignment 2 (1228) Page 2 of 5
Input from Stakeholders
As part of your research, you have sought input from several stakeholders. Each has raised important
points to consider in your analysis and recommendation. Some of the points and assumptions are purely
financial. Others touch on additional concerns and opportunities.
1. Angela, your colleague from Accounting, recommends using the base assumptions above: 5-year
project life, flat annual savings, and 10% discount rate. Angela does not feel the equipment will
have any terminal value due to advancements in technology.
2. Bob from Sales is convinced that this capability would create a new revenue stream that could
significantly offset operating expenses. He recommends savings that grow each year: 5-year
project life, 10% discount rate, and a 10% annual savings growth in years 2 through 5. Inother
words, instead of assuming savings stay flat, assume that they will grow by 10% in year 2, then
grow another 10% over year 2 in year 3, and so on. Bob feels that the stated terminal value of
$30,000 is reasonable and uses it in his calculations.
3. Carla from Engineering believes we should use a higher Discount Rate because of the risk of this
type of project. As such, she is recommending a 5-year project life and flat annual savings. Carla
suggests that even though the equipment is brand new, the updated production process could have
anegative impact on other parts of the overall manufacturing costs. She argues that, while it is
difficult to quantify the potential negative impacts, to account for the risk, a 15% discount rate
should be used. As an engineer, Carla feels that the stated terminal value is low based on her
experience and recommends a $55,000 terminal value.
4. Delilah, the Product Manager, is convinced the new capability will allow better quality control and
on-time delivery and that it will last longer than 5 years. She recommends using a 7 Year
Equipment Life (which means a 7-year project and that savings will continue for 7 years), flat
annual savings, and 10% discount rate. In other words, assume that the machine will last 2 more
years and deliver 2 more years of savings. Delilah also feels the equipment will have an estimated
terminal value of $20,000 at the end of its 7-year useful life as it will be utilized longer, thus having
less value at the end of the project and savings.
5. Edward, the head of Operations, is concerned that instead of stabilizing the supply chain, it will just
add another process to be managed and will distract from the core competencies the company
currently has. He feels the company should focus on improving communication and supply chain
management with its current vendor, and he feels confident he can negotiate a discount of 3% off
the annual outsourcing cost of $1,500,000 if he lets it be known they are considering taking over
this step of the process. As there is little risk associated with Edward’s proposal due to no upfront
capital requirements, a lower risk-free discount rate of 7% would be appropriate. Edward feels that
any price reductions from the current vendor will last for five years. (NOTE: because there is no
“investment,” the Payback and IRR metrics are not meaningful. Simply provide the NPV of the
Savings cash flows).
JWI 530: Financial Management I
Assignment 2
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copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.
JWI 530 Assignment 2 (1228) Page 3 of 5
PART A: Data Calculations
Using the data presented above (and ignoring the extraneous information), for this profit and supply
chain improvement project, calculate each of the following (where applicable):
• Nominal Payback
• Discounted Payback
• Net Present Value
• Internal Rate of Return
Scenario Nominal
Payback
Discounted
Payback
Net Present
Value
Internal Rate of
Return
#1: Angela
#2: Bob
#3: Carla
#4: Delilah
#5: Edward N/A N/A N/A
Submission Requirements
Present your calculations and results either in an Excel Spreadsheet or in Word (using tables and headers
to organize the information in a way that is clear and easy to read). Be sure to show your detailed
calculations. If you get something wrong, you may still be able to get partial credit.
JWI 530: Financial Management I
Assignment 2
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copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.
JWI 530 Assignment 2 (1228) Page 4 of 5
Part B: Recommendations
After completing the calculations for all scenarios, create a brief memo to the CEO outlining your
committee’s recommendations. You may organize the memo as you see fit, but it must include the following:
• A clear opening statement of your recommendation for or against the project.
• A brief synopsis of the processes and factors that led to your recommendations.
o What information did you gather, and how did you get it?
o From whom did you seek input, and why?
• A summary of the strategic benefits and risks in pursuing (or not pursuing) this project, including:
o Highlights of the main data points that support your position
o Acknowledgment of the data points that oppose your argument
o Identification of open/unresolved items
• Identification of the scenario that, from a purely financial perspective, represents the most accurate
estimate of the anticipated results and your rationale as to why.
• Identification of non-financial elements that need to be considered for the recommended scenario.
• Any assumptions in project economics can have a significant impact on the result. Identify 3 financial
elements/assumptions in your analysis that would make this project financially unattractive. Be as
transparent and candid as possible. What would have to be true for this to be a bad investment?
• A summary restating your recommendation and key action items.
