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  • Read the case below. The CNC machine decision case below.
  • Write a page to identify the strengths and weaknesses of the two options  French in the case study.  Comment on the advantages and disadvantages of each method.

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Adapted from IMA

IMA EDUCATIONAL CASE JOURNAL VOL. 10, NO. 3, ART. 1, SEPTEMBER 2017

ISSN 1940-204X

Peregrine: The CNC Machine Decision

Tony Bell Thompson Rivers University Dr. Andrew Fergus Thompson Rivers University

INTRODUCTION

It was another sleepless night for Brian French. As a new father, French had grown

accustomed to sleep deprivation, but on this night, it was his business—not his newborn

daughter—that had him tossing and turning. French was the president and co-owner of

Peregrine, a Vancouver-based manufacturer of custom retail displays that were used in

stores, banks, and art galleries. Peregrine had been working on a display for Best Buy

when one of the company’s two computer-numerical-control (CNC) machines broke

down. When the machine went down, French watched progress on the Best Buy job

slow to a halt. Although French had been assured that the CNC machine would be back

up and running within 24 hours, the breakdown revealed a deeper problem: the CNC

machines represented a major bottleneck for Peregrine, and if this machine was down

for more than the promised 24-hour period, the Best Buy job could not be completed on

time, and workers would need to be sent home. French was frustrated by this

predicament and was determined to make the changes necessary to ensure it would not

happen again.

PEREGRINE

In 2012, French left PricewaterhouseCoopers to purchase Peregrine along with two co- investors. The investment team had been looking for an opportunity to purchase a company with a successful track record and a founder who was ready for retirement; Peregrine had fit the bill. Founded in 1977, Peregrine had been operated profitably for 35 years in downtown Vancouver, British Columbia, Canada. In Peregrine, the investors would be acquiring a company with a history of success and an experienced team that had expertise in manufacturing a wide array of custom plastic products. When Peregrine was acquired in 2012, it had employed 6 people and had $600,000 in sales. Under French’s management, the company had grown to more than 30 employees and more than $6 million in sales by 2016.

 

 

 

THE CNC MACHINE DECISION

When the CNC machine broke down, it was a wake-up call for French. The production line was dependent on both CNC machines working full time—if they slowed down or needed repair, the business suffered. French believed the key to relieving this bottleneck would be increasing capacity. It not only would prevent downtime but also would allow the company to take on new business. If capacity increased, French estimated that sales revenues would rise by at least $50,000 per month due to unmet demand and increased efficiency. The company’s margins on the additional revenues were expected to be 35%. French saw two viable options to increase capacity:

1. Purchase an additional CNC machine for cash, or 2. Finance the purchase of an additional CNC machine

1 French considered the details of each option, keeping in mind that for long-term projects he would use a discount rate of 7%.

OPTION 1: PURCHASE A NEW CNC MACHINE WITH CASH Although it would be costly, the idea of adding a third CNC machine appealed to French. It would provide him peace of mind that if there were a breakdown, jobs would continue on schedule. French’s preliminary research revealed that the cost of the new equipment would be $142,000. He also estimated that there would be increased out-of- pocket operating costs of $10,000 per month if a new machine were brought online. After five years, the machine would have a salvage value of $40,000. Although Peregrine did not have the cash readily available to make the purchase, French believed that with a small amount of cash budgeting and planning, this option would be feasible.

OPTION 2: FINANCE THE PURCHASE OF A NEW CNC MACHINE The company selling the CNC machine also offered a leasing option. The terms of the lease included a down payment of $50,000 and monthly payments of $2,200 for five years. After five years, the equipment could be purchased for $1. The operating costs and salvage values would be the same as option 1, the purchasing option. The company had the necessary cash on hand to make the down payment for the lease. With both the leasing and purchasing options, the company had sufficient space to operate the new equipment, and French believed he had almost all of the right employees in place to execute this plan.