In response to poor internal investment decisions, Ray has introduced a more formal approach to quantifying costsand benefits in an attempt to prioritise projects that compete for his limited funds and time. His first formal cost-benefitanalysis helped him select a new machine for producing certain components in his factory. The results of his analysisare shown in figure one. The cost of the machine was $90,000, with annual maintenance fees of $5,000. Ray hasseen the machine working and he believes that he can save the cost of one technician straight away. These savingsare shown as reduced staff costs. The manufacturer of the machine claims that the accuracy of the machine leads toreduced wastage of “up to 10%”. NMS have detailed measures of the wastage of the current machine and Ray hasused this to estimate wastage savings. The increased accuracy of the machine over time is reflected in his estimates.Finally, the manufacturer claims ‘energy savings’. NMS currently know the energy costs of the whole factory – but notof individual machines. However, Ray thinks that his estimates for energy savings are realistic. He concludes that “overfive years the machine breaks even, so this seems a reasonable business case to me”. Overall summary financial datafor NMS is presented in figure two.
Figure one: Business case for new machine
All figures in $000Cost of the machine 90Maintenance costs 0 5 5 5 5 5Reduced staff costs 0 15 15 15 15 15Reduced wastage 0 2 4 6 8 10Energy savings 0 2 2 2 2 2
Figure two: Financial analysis NMS 2007–2010
RevenueDomestic 6,235 6,930 6,300 4,500International 520 650 500 300Total 6,755 7,580 6,800 4,800Cost of Sales 4,700 5,000 4,200 2,850Gross profit 2,055 2,580 2,600 1,950Overhead expenses 1,900 2,010 1,900 1,400Profit before tax and finance costs 155 570 700 550Finance costs 165 150 120 25Tax expense 17 62 75 60Profit for the year -27 358 505 465
Employees 75 75 60 45% of orders late 6 10 7 5Order book 2,500 3,750 4,150 3,505
Required:(a) Evaluate the macro-environment of NMS using a PESTEL analysis.
(b) Analyse the industry or marketplace environment that NMS is competing in.
Professional marks will be awarded in part (b) for clarity, structure and an appropriate approach.
(c) Figures one and two summarise two financial aspects of NMS(i) Analyse the financial position of NMS.
(ii) Evaluate the cost-benefit analysis used to justify the purchase of the new machine.