Funding the Future at ABC Welding Background As a new engineering employee of ABC Welding, ABCW, a firm that uses advanc
Posted: Wed Mar 09, 2022 8:39 am
Funding the Future at ABC Welding
Background
As a new engineering employee of ABC Welding, ABCW, a firm that
uses advanced technology welding to weld pressure vessels you have
been ‘volunteered’ to participate in a Resource Planning Group,
RPG. There were two reasons for the invitation to join
the RPG. First, since you are new to the firm you will likely
bring a fresh perspective to the RPG, hence ABCW. Second,
after reviewing your college transcript it was noted that you had
taken an engineering economics class as part of your
education. As a consequence the RPG felt your input would be
valuable.
Although ABCW has been able to deliver to industry it’s core
product of welded pressure vessels, ABCW is not satisfied with the
quality of the finished product nor the amount of time it takes to
deliver the vessels themselves. Management at ABCW is of the
opinion that even though the current welding processes are
satisfactory, the overall productivity of ABCW is lacking.
The option to maintain the current processes in view of the
competiveness of the market is increasingly risky.
Therefore the focus of the RGP is to be on future welding
technology.
Specifics
In particular, the agenda of the RGP folks is to focus on the
robotic welding, RW, of the pressure vessels. Even though RPG
uses RW, management feels that the promise of this technology has
not fully materialized. Consequently, the RPG has a twofold
mission. A section of the RPG is to identify new RW
technologies that would increase the productivity of ABCW’s current
productivity. A second section within the RPG is to estimate
funding for the new future technology. This second section of
the RGP is to help reconcile ABCW’s proposed funding scheme with
the funding requirements of the new technology.
Hence, the RPG is divided into two sections: scope and
funding. Since you have an engineering economics background,
you are part of the RPG funding section. The funding section
is to assume that the scope section RW proposals fulfill the
functions required by ABCW.
ABCW Management’s Proposed Funding Scheme
This is the funding schedule proposed by ABCW financial
managers: starting at end of year 1, EOY 1, ABCW will deposit
$500K into an account that will pay interest at ABCW’s cost of
capital, 8% APR. However, in order to mitigate the risk to
ABCW the finance department requires the 8% APR to be compounded
daily. In addition to the initial EOY 1 annual payment, ABCW
will deposit an annual amount at the end of each year up to an
including EOY 5. The amount of the deposit will
decrease by $100K each year from the EOY 1 deposit beginning EOY 2
until EOY 5.
In addition for EOY 6 to EOY 10 ABCW’s financial folks are of
the opinion that no extra funding should be deposited into this
fund because several pieces of existing equipment will be requiring
scheduled overalls.
RPG’s Scope Section Funding Requirements
The scope section of the RPG believes that the RW technology
required by ABCW will not be available until EOY 11 or eleven years
from now. Based on that timing, the scope section also
believes that ABCW will need to have $700K on hand to fund EOY
11. In subsequent years from EOY 11 the amount of annual
funding required will decrease by 10% each year until EOY 20.
At EOY 20 or twenty years from now, ABCW envisions the new
technology to be fully operational. Thus the funding
requirements for scope section will be fully expended.
RPG’s Funding Section
The funding section of the RPG has the task of bringing reality
to ABCW. The funding section is tasked with reconciling the
proposed funding scheme from the ABCW’s financial folks (EOY 1 to
EOY 5) with the estimated monetary requirements proposed by the
RPG’s scope section folks. (EOY 11 to EOY 20) Using the proposed
ABCW funding scheme along with the RPG’s funding requirements, the
funding section must decide if the funds generated by deposits in
EOY 1 to 5 provide sufficient funds to cover the expense
requirements of the future technology beginning EOY 11. The
objective of ABCW is to implement the new technology without having
to borrow money.
Case Focus Questions/Deliverables
Some of the members of the RPG funding section wish to take
their mandate a bit further. The funding section members
think that it might be easier to secure funds if both the ABCW
scheme and the RPG funding requirements in terms of what it would
cost as of today.
Another funding section member thinks that it might be easier to
secure funding if the monetary requirements were presented in terms
of an equivalent annual expenditure. She suggests
that the current funding plan proposed the ABCW finance scheme is
too complicated. In fact she thinks that ABCW could well
afford depositing 150K per year but over a 10 year period.
Background
As a new engineering employee of ABC Welding, ABCW, a firm that
uses advanced technology welding to weld pressure vessels you have
been ‘volunteered’ to participate in a Resource Planning Group,
RPG. There were two reasons for the invitation to join
the RPG. First, since you are new to the firm you will likely
bring a fresh perspective to the RPG, hence ABCW. Second,
after reviewing your college transcript it was noted that you had
taken an engineering economics class as part of your
education. As a consequence the RPG felt your input would be
valuable.
Although ABCW has been able to deliver to industry it’s core
product of welded pressure vessels, ABCW is not satisfied with the
quality of the finished product nor the amount of time it takes to
deliver the vessels themselves. Management at ABCW is of the
opinion that even though the current welding processes are
satisfactory, the overall productivity of ABCW is lacking.
The option to maintain the current processes in view of the
competiveness of the market is increasingly risky.
Therefore the focus of the RGP is to be on future welding
technology.
Specifics
In particular, the agenda of the RGP folks is to focus on the
robotic welding, RW, of the pressure vessels. Even though RPG
uses RW, management feels that the promise of this technology has
not fully materialized. Consequently, the RPG has a twofold
mission. A section of the RPG is to identify new RW
technologies that would increase the productivity of ABCW’s current
productivity. A second section within the RPG is to estimate
funding for the new future technology. This second section of
the RGP is to help reconcile ABCW’s proposed funding scheme with
the funding requirements of the new technology.
Hence, the RPG is divided into two sections: scope and
funding. Since you have an engineering economics background,
you are part of the RPG funding section. The funding section
is to assume that the scope section RW proposals fulfill the
functions required by ABCW.
ABCW Management’s Proposed Funding Scheme
This is the funding schedule proposed by ABCW financial
managers: starting at end of year 1, EOY 1, ABCW will deposit
$500K into an account that will pay interest at ABCW’s cost of
capital, 8% APR. However, in order to mitigate the risk to
ABCW the finance department requires the 8% APR to be compounded
daily. In addition to the initial EOY 1 annual payment, ABCW
will deposit an annual amount at the end of each year up to an
including EOY 5. The amount of the deposit will
decrease by $100K each year from the EOY 1 deposit beginning EOY 2
until EOY 5.
In addition for EOY 6 to EOY 10 ABCW’s financial folks are of
the opinion that no extra funding should be deposited into this
fund because several pieces of existing equipment will be requiring
scheduled overalls.
RPG’s Scope Section Funding Requirements
The scope section of the RPG believes that the RW technology
required by ABCW will not be available until EOY 11 or eleven years
from now. Based on that timing, the scope section also
believes that ABCW will need to have $700K on hand to fund EOY
11. In subsequent years from EOY 11 the amount of annual
funding required will decrease by 10% each year until EOY 20.
At EOY 20 or twenty years from now, ABCW envisions the new
technology to be fully operational. Thus the funding
requirements for scope section will be fully expended.
RPG’s Funding Section
The funding section of the RPG has the task of bringing reality
to ABCW. The funding section is tasked with reconciling the
proposed funding scheme from the ABCW’s financial folks (EOY 1 to
EOY 5) with the estimated monetary requirements proposed by the
RPG’s scope section folks. (EOY 11 to EOY 20) Using the proposed
ABCW funding scheme along with the RPG’s funding requirements, the
funding section must decide if the funds generated by deposits in
EOY 1 to 5 provide sufficient funds to cover the expense
requirements of the future technology beginning EOY 11. The
objective of ABCW is to implement the new technology without having
to borrow money.
Case Focus Questions/Deliverables
Some of the members of the RPG funding section wish to take
their mandate a bit further. The funding section members
think that it might be easier to secure funds if both the ABCW
scheme and the RPG funding requirements in terms of what it would
cost as of today.
Another funding section member thinks that it might be easier to
secure funding if the monetary requirements were presented in terms
of an equivalent annual expenditure. She suggests
that the current funding plan proposed the ABCW finance scheme is
too complicated. In fact she thinks that ABCW could well
afford depositing 150K per year but over a 10 year period.