Matthew Shustack

3:30
Peregrine (Extra Credit)

Each option has strengths and weaknesses associated with them. For Option 1,

purchasing a new CNC machine with cash, outright purchasing a machine gives more financial

freedom than being tied to a lease payment and would give the business a greater ability to

expand operations in the future. However, Peregrine is concerned with meeting its deadlines for

Best Buy now. Purchasing a new machine requires time for budgeting to work well enough to

get the cash on had for purchase and does not account for the time that may be missed between

repairing the machine at issue and receiving the third. The work speed would increase with all

three running, but this may come too late. For Option 2, Financing a new machine, Peregrine

still increases its capacity and is able to expand, in addition to eventually obtaining the machine

with its salvage value at the end of the lease. A key factor here is Peregrine’s ability to make the

lease happen now, as it has the cash on hand for the down payment. A downside of Option 2 is

an increased cost per month of the operating expense and the lease payment.

Finally, Option 3, adding a new shift, also has strengths and weaknesses. Adding an

overnight shift would increase round the clock productivity and so would allow Peregrine to

make up for lost time on the broken machine’s repairs without shelling out the cash for a whole

new machine. This could also expand the business as new employees can be hired, and new jobs

can be taken on. On the downside, there would be increased expenses associated with working

around the clock and hiring new employees, not to mention the possibility of disgruntled

employees who do not look favorably on a potential night shift. This and the problems with

supervision overnight are factors Peregrine should consider with Option 3.

 Option Element N I/Y PV PMT FV CPT PV NPV
1  
Operating $
  Expense 5 7.00% CPT 120,000.00 $ - $ (492,023.69)  
$
  Revenue 5 7.00% CPT 210,000.00 $ - $ 861,041.46  

$40,000.0
  Salvage Value 5 7.00% CPT $ - 0 $ 28,519.44  
  Machine Cost N/A N/A N/A N/A N/A $ (142,000.00)  

$255,537.2
  1
Operating $
2 Expense 5 7.00% CPT 120,000.00 $ - $ (492,023.69)  
$
  Revenue 5 7.00% CPT 210,000.00 $ - $ 861,041.46  

$40,000.0
  Salvage Value 5 7.00% CPT $ - 0 $ 28,519.44  
$
  Lease Expense 5 7.00% CPT 26,400.00 $ - $ (108,245.21)  
  Machine Cost N/A N/A N/A N/A N/A $ (50,000.00)  

$239,292.0
  0
Operating $
3 Expense 5 7.00% CPT 144,000.00 $ - $ (590,428.43)  
$
  Revenue 5 7.00% CPT 210,000.00 $ - $ 861,041.46  

$270,613.0
  3
                 

Payback
Option Investment CF CF CF Total CF PD

$210,000.0 $(120,000.00
Option 1 $ 142,000.00 0 ) N/A $ 90,000.00 1.58

$210,000.0 $(120,000.00
Option 2 $ 50,000.00 0 ) $(26,400.00) $ 63,600.00 0.79
Option 3 N/A N/A N/A N/A N/A N/A
 Based on the NPV and Payback Period for each option, calculated above, Option 3 of

adding an additional shift is the most financially secure. Option 3 does have its own challenges

with staffing but has the highest NPV of the options in addition to lacking a payback period. If

Option 3 is determined to be not feasible for lack of willing employees in house or seeking jobs,

Option 1 has the next best NPV. Although Option 1 has a longer Payback Period than Option 2,

the ability to expand Peregrine may be increased more by outright owning the new machine than

by leasing it, and this is expressed in part in the higher NPV.

To the nearest 1%, a discount rate of 14.00% yields a higher NPV for Option 2 than

Option 3. Calculations are shown below comparing a rate of 13.00% and 14.00%.

Discount
Rate Element N I/Y PV PMT FV CPT PV NPV
13%  
Operating
Option 1 Expense 5 13.00% CPT $ 120,000.00 $ - $ (422,067.75)  
  Revenue 5 13.00% CPT $ 210,000.00 $ - $ 738,618.56  

  Salvage Value 5 13.00% CPT $ - $40,000.00 $ 21,710.40  

  Machine Cost N/A N/A N/A N/A N/A $ (142,000.00)  

  $196,261.21
Operating
13% Expense 5 13.00% CPT $ 120,000.00 $ - $ (422,067.75)  
Option 2 Revenue 5 13.00% CPT $ 210,000.00 $ - $ 738,618.56  

  Salvage Value 5 13.00% CPT $ - $40,000.00 $ 21,710.40  

  Lease Expense 5 13.00% CPT $ 26,400.00 $ - $ (92,854.91)  
  Machine Cost N/A N/A N/A N/A N/A $ (50,000.00)  

  $195,406.30
14%  
Operating
Option 1 Expense 5 14.00% CPT $ 120,000.00 $ - $ (411,969.72)  
  Revenue 5 14.00% CPT $ 210,000.00 $ - $ 720,947.00  

  Salvage Value 5 14.00% CPT $ - $40,000.00 $ 20,774.23  

  Machine Cost N/A N/A N/A N/A N/A $ (142,000.00)  

  $187,751.51
 Operating
14% Expense 5 14.00% CPT $ 120,000.00 $ - $ (411,969.72)  
Option 2 Revenue 5 14.00% CPT $ 210,000.00 $ - $ 720,947.00  

  Salvage Value 5 14.00% CPT $ - $40,000.00 $ 20,774.23  

  Lease Expense 5 14.00% CPT $ 26,400.00 $ - $ (90,633.34)  
  Machine Cost N/A N/A N/A N/A N/A $ (50,000.00)  

                $189,118.17