A light manufacturing firm has set up a project for develop- ing a new machine for one of its production lines. The most likely estimated cost of the project itself is $1,000,000, but the most optimistic estimate is $900,000 while the pessimists predict a project cost of $1,200,000. The real problem is that even if the project costs are within those limits, if the project itself plus its implementation costs exceed $1,425,000, the project will not meet the firm’s NPV hurdle. There are four cost categories involved in adding the prospective new machine to the production line: (1) engineering labor cost, (2) nonengineering labor cost, (3) assorted material cost, and (4) production line downtime cost. The engineering labor requirement has been estimated to be 600 hours, plus or minus 15 percent at a cost of $80 per hour. The nonengineering labor requirement is esti- mated to be 1,500 hours, but could be as low as 1,200 hours or as high as 2,200 hours at a cost of $35 per hour. Assorted material may run as high as $155,000 or as low as $100,000, but is most likely to be about $135,000. The best guess of time lost on the production line is 110 hours, possibly as low as 105 hours, and as high as 120 hours. The line con- tributes about $500 per hour to the firm’s profit and over- head. What is the probability that the new machine project will meet the firm’s NPV hurdle?
A light manufacturing firm has set up a project for develop- ing a new machine for one of its production lines. The most likely estimated cost of the project itself is $1,000,000, but the most optimistic estimate is $900,000 while the pessimists predict a project cost of $1,200,000. The real problem is that even if the project costs are within those limits, if the project itself plus its implementation costs exceed $1,425,000, the project will not meet the firm’s NPV hurdle. There are four cost categories involved in adding the prospective new machine to the production line: (1) engineering labor cost, (2) nonengineering labor cost, (3) assorted material cost, and (4) production line downtime cost.
The engineering labor requirement has been estimated to be 600 hours, plus or minus 15 percent at a cost of $80 per hour. The nonengineering labor requirement is esti- mated to be 1,500 hours, but could be as low as 1,200 hours or as high as 2,200 hours at a cost of $35 per hour. Assorted material may run as high as $155,000 or as low as $100,000, but is most likely to be about $135,000. The best guess of time lost on the production line is 110 hours, possibly as low as 105 hours, and as high as 120 hours. The line con- tributes about $500 per hour to the firm’s profit and over- head. What is the probability that the new machine project will meet the firm’s NPV hurdle?
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