INTRODUCTION It was another sleepless night for Brian French. As a new father, French had grown accustomed to sleep depr
Posted: Sun Jun 05, 2022 6:46 am
INTRODUCTION
It was another sleepless night for Brian French. As a new
father, French had grown accustomed to sleep deprivation, but on
this night, it was his business—not his newborn daughter—that had
him tossing and turning. French was the president and co-owner of
Peregrine, a Vancouver- based manufacturer of custom retail
displays that were used in stores, banks, and art galleries
(Exhibit 1). Peregrine
had been working on a display for Best Buy when one of the
company’s two computer-numerical-control (CNC) machines broke down
(Exhibit 2). When the machine went down, French watched progress on
the Best Buy job slow
to a halt. Although French had been assured that the CNC machine
would be back up and running within 24 hours, the breakdown
revealed a deeper problem: the CNC machines represented a major
bottleneck for Peregrine, and if this machine was down for more
than the promised 24-hour period, the Best Buy job could not be
completed on time, and workers would need to be sent home. French
was frustrated by this predicament and was determined to make the
changes necessary to ensure it would not happen again.
PEREGRINE
In 2012, French left PricewaterhouseCoopers to purchase
Peregrine along with two co-investors. The investment team had been
looking for an opportunity to purchase a company with a successful
track record and a founder who
was ready for retirement; Peregrine had fit the bill. Founded in
1977, Peregrine had been operated profitably for 35 years in
downtown Vancouver, British Columbia, Canada. In Peregrine, the
investors would be acquiring a company with a history of success
and an experienced team that had expertise in manufacturing a wide
array of custom plastic products.
When Peregrine was acquired in 2012, it had employed 6 people
and had $600,000 in sales. Under French’s management, the company
had grown to more than 30 employees and more than $6 million in
sales by 2016.
THE CNC MACHINE DECISION
When the CNC machine broke down, it was a wake-up call for
French. The production line was dependent on both CNC machines
working full time—if they slowed down or needed repair, the
business suffered. French believed the key to relieving this
bottleneck would be increasing capacity. It not only would prevent
downtime but also would allow the company to take on new business.
If capacity increased, French estimated that sales revenues would
rise by at least $50,000 per month due to unmet demand and
increased efficiency. The company’s margins on the additional
revenues were expected to be 35%. French saw three viable options
to increase capacity:
Purchase an additional CNC machine for cash,
Finance the purchase of an additional CNC machine, or
Add a third shift (a night shift) to better utilize the two
CNC machines Peregrine already owned.
French considered the details of each option, keeping in mind
that for long-term projects he would use a discount rate of 7%.
OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH
Although it would be costly, the idea of adding a third CNC
machine appealed to French. It would provide him peace of mind that
if there were a breakdown, jobs would continue on schedule.
French’s preliminary research revealed that the cost of the new
equipment would be $142,000. He also estimated that there would be
increased out-of-pocket operating costs of $10,000 per month if a
new machine were brought online. After five years, the machine
would have a salvage value of $40,000. Although Peregrine did not
have the cash readily available to make the purchase, French
believed that with a small amount of cash budgeting and planning,
this option would be feasible.
OPTION 2: FINANCE THE PURCHASE OF A NEW CNC MACHINE
The company selling the CNC machine also offered a leasing
option. The terms of the lease included a down payment of $50,000
and monthly payments of $2,200 for five years. After five years,
the equipment could be purchased for $1. The operating costs and
salvage values would be the same as option 1, the purchasing
option. The company had the necessary cash on hand to make the down
payment for the lease. With both the leasing and purchasing
options,
the company had sufficient space to operate the new equipment,
and French believed he had almost all of the right employees in
place to execute this plan.
OPTION 3: ADD A THIRD SHIFT
French and one of his co-investors had extensive experience in
the trucking industry and had seen firsthand the effect
of utilizing equipment around the clock. French believed adding a
third shift could unlock a lot of value at Peregrine, and it could
be done at a low cost. Adding a third shift would involve moving
several existing employees to work the night shift and would also
mean hiring some new employees. Although French believed that in
time he may add a full third shift to increase overall capacity,
his initial plan was for the night shift to run as a “skeleton
crew” with the primary purpose of keeping the CNC machines
operational for 24 hours. He believed that adding a third shift
would produce the same increase in revenue as adding a new CNC
machine to his existing shifts. He estimated that adding a third
shift would create $12,000 in additional monthly out-of-pocket
operating costs, but no new machinery would need to be
purchased. Based on his trucking experience, French knew this
option would be difficult to execute, as there were major safety
and supervision challenges associated with running a night
shift.
MOVING FORWARD
French wanted to get moving on a solution and arranged
a conference call with his two co-owners. He knew his co- owners
would be eager to learn the numbers behind each option, but he also
knew that nonfinancial information would be just as crucial in
making a recommendation. Before the call, French sat down at his
desk to fully analyze the options.
ASSIGNMENT QUESTIONS
2. Compute and compare the net present value and payback
period of each option.
need it as an excel form to show the computing process
It was another sleepless night for Brian French. As a new
father, French had grown accustomed to sleep deprivation, but on
this night, it was his business—not his newborn daughter—that had
him tossing and turning. French was the president and co-owner of
Peregrine, a Vancouver- based manufacturer of custom retail
displays that were used in stores, banks, and art galleries
(Exhibit 1). Peregrine
had been working on a display for Best Buy when one of the
company’s two computer-numerical-control (CNC) machines broke down
(Exhibit 2). When the machine went down, French watched progress on
the Best Buy job slow
to a halt. Although French had been assured that the CNC machine
would be back up and running within 24 hours, the breakdown
revealed a deeper problem: the CNC machines represented a major
bottleneck for Peregrine, and if this machine was down for more
than the promised 24-hour period, the Best Buy job could not be
completed on time, and workers would need to be sent home. French
was frustrated by this predicament and was determined to make the
changes necessary to ensure it would not happen again.
PEREGRINE
In 2012, French left PricewaterhouseCoopers to purchase
Peregrine along with two co-investors. The investment team had been
looking for an opportunity to purchase a company with a successful
track record and a founder who
was ready for retirement; Peregrine had fit the bill. Founded in
1977, Peregrine had been operated profitably for 35 years in
downtown Vancouver, British Columbia, Canada. In Peregrine, the
investors would be acquiring a company with a history of success
and an experienced team that had expertise in manufacturing a wide
array of custom plastic products.
When Peregrine was acquired in 2012, it had employed 6 people
and had $600,000 in sales. Under French’s management, the company
had grown to more than 30 employees and more than $6 million in
sales by 2016.
THE CNC MACHINE DECISION
When the CNC machine broke down, it was a wake-up call for
French. The production line was dependent on both CNC machines
working full time—if they slowed down or needed repair, the
business suffered. French believed the key to relieving this
bottleneck would be increasing capacity. It not only would prevent
downtime but also would allow the company to take on new business.
If capacity increased, French estimated that sales revenues would
rise by at least $50,000 per month due to unmet demand and
increased efficiency. The company’s margins on the additional
revenues were expected to be 35%. French saw three viable options
to increase capacity:
Purchase an additional CNC machine for cash,
Finance the purchase of an additional CNC machine, or
Add a third shift (a night shift) to better utilize the two
CNC machines Peregrine already owned.
French considered the details of each option, keeping in mind
that for long-term projects he would use a discount rate of 7%.
OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH
Although it would be costly, the idea of adding a third CNC
machine appealed to French. It would provide him peace of mind that
if there were a breakdown, jobs would continue on schedule.
French’s preliminary research revealed that the cost of the new
equipment would be $142,000. He also estimated that there would be
increased out-of-pocket operating costs of $10,000 per month if a
new machine were brought online. After five years, the machine
would have a salvage value of $40,000. Although Peregrine did not
have the cash readily available to make the purchase, French
believed that with a small amount of cash budgeting and planning,
this option would be feasible.
OPTION 2: FINANCE THE PURCHASE OF A NEW CNC MACHINE
The company selling the CNC machine also offered a leasing
option. The terms of the lease included a down payment of $50,000
and monthly payments of $2,200 for five years. After five years,
the equipment could be purchased for $1. The operating costs and
salvage values would be the same as option 1, the purchasing
option. The company had the necessary cash on hand to make the down
payment for the lease. With both the leasing and purchasing
options,
the company had sufficient space to operate the new equipment,
and French believed he had almost all of the right employees in
place to execute this plan.
OPTION 3: ADD A THIRD SHIFT
French and one of his co-investors had extensive experience in
the trucking industry and had seen firsthand the effect
of utilizing equipment around the clock. French believed adding a
third shift could unlock a lot of value at Peregrine, and it could
be done at a low cost. Adding a third shift would involve moving
several existing employees to work the night shift and would also
mean hiring some new employees. Although French believed that in
time he may add a full third shift to increase overall capacity,
his initial plan was for the night shift to run as a “skeleton
crew” with the primary purpose of keeping the CNC machines
operational for 24 hours. He believed that adding a third shift
would produce the same increase in revenue as adding a new CNC
machine to his existing shifts. He estimated that adding a third
shift would create $12,000 in additional monthly out-of-pocket
operating costs, but no new machinery would need to be
purchased. Based on his trucking experience, French knew this
option would be difficult to execute, as there were major safety
and supervision challenges associated with running a night
shift.
MOVING FORWARD
French wanted to get moving on a solution and arranged
a conference call with his two co-owners. He knew his co- owners
would be eager to learn the numbers behind each option, but he also
knew that nonfinancial information would be just as crucial in
making a recommendation. Before the call, French sat down at his
desk to fully analyze the options.
ASSIGNMENT QUESTIONS
2. Compute and compare the net present value and payback
period of each option.
need it as an excel form to show the computing process