HOME WORK SET 3

1) The cash flows of an advanced manufacturing system are as follows:

EOY (t) DESCRIPTION AMOUNT ($)

0 Investment 3,000,000
1-4 Revenues 1,500,000
1-4 Expenses 500,000
4 Salvage value 500,000

The company pays income tax at 32 %and the allowed depreciation schedule as
follows.

YEAR DEPRECIATION %

1 33.33
2 44.45
3 14.81
4 7.41

Compute NPV1, NPV2 and NPV using an MARR of 10 %. Assume that OCT =
0 for all t.

2) A company is considering investment in a Flexible Manufacturing System. The

estimated cash flows for this investment are as follows:

EOY (t) DESCRIPTION AMOUNT ($)

0 Investment F0
1-4 Revenues 1,000,000
1-4 Expenses 500,000

The company pays income tax at 35 % and the allowed depreciation schedule as
follows.

YEAR DEPRECIATION %

1 33.33
2 44.45
3 14.81
4 7.41

Assume that the MARR is 10 %.

(a) Compute NPV2.

 (b) What is the maximum value of the investment value (F0) which makes
this investment attractive ?

3) A manufacturing company is considering replacement of its existing manufacturing

system by a CIM system. It manufactures only one product. The planning horizon is one
year. The marginal tax rate is 30 % and the after tax MARR is 10 %. The data for the
CIM system is as follows:

Demand of the product / year : 2000

Upper limit on the total expenses for year one: $ 10,000
Sales price per unit of the product: $ 10.00
Set-up cost per unit: $ 0.50.
Labor cost per unit: $ 1.50
Idle cost per unit: $ 0.50
Holding cost per unit of inventory: $ 1.00
Back order cost per unit back ordered: $ 3.00

Disregard all the other costs. Assuming that both the inventory and the back order
quantities at the beginning of year 1 = 0. The inventory and back order quantities at the
end of year 1 need not be 0.

Set up this as a linear programming problem so that the decision maker can find
NPV2 for the CIM system.

4) Modify Problem 3 as follows:

Planning Horizon: 2 years.

Demand in second year : 2500
Upper limit on the total expenses for the second year: $ 10,000

The costs and the price are same as given above for years 1 and 2. The inventory and
back order quantities at the end of year 2 need not be 0.

Set up this as a linear programming problem so that the decision maker can find
NPV2 for the CIM system.

5) The process plan for a component requires it to be processed on four machines. The
raw material per unit costs $ 20.00. The amount of value added on each of the four
machines and the estimated amount of time the semi-finished component has to spend
before and at each of these machines are as follows:
 Machine Total Time (Days) Value Added ($)

1 1.5 (t0) 15.00

2 2.0 (t1) 25.00
3 1.6 (t2) 40.00
4 2.5 (t3) 35.00
0.5 (t4)
Compute the average work-in-process cost per unit of this component.

6) The following table gives the values added and the waiting times of a component
being manufactured currently in the shop.

Raw material cost per unit: $ 10.00.

Operation Number Total Time (hrs.) Value Added ($)

1 168 (t0) 15.00

2 48 (t1) 20.00
3 40 (t2) 20.00
The component waits five hours (t3) before being sent to the stores.

(b) Compute the WIP cost per item.

(c) The company is considering buying a new machine for operation 2,
which is expected to reduce the time before operation 2.
Estimate the expected reduction in the WIP cost per item for every
one hour reduction in the waiting time before operation 2.