Rain Irrigation, Inc.,

Assignment
Always Rain Irrigation, Inc., would like to determine capacity requirements for the next four years. Currently two production lines are in place for making bronze and plastic sprinklers. Three types of sprinklers are available in both bronze and plastic: 90-degree nozzle sprinklers, 180-degree nozzle sprinklers, and 360-degree nozzle sprinklers. Management has forecast demand for the next four years as follows:

YEARLY DEMAND
1 (IN 000s) 2 (IN 000s) 3 (IN 000s) 4 (IN 000s)
Plastic 90 32 44 55 56
Plastic 180 15 16 17 18
Plastic 360 50 55 64 67
Bronze 90 7 8 9 10
Bronze 180 3 4 5 6
Bronze 360 11 12 15 18
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Both production lines can produce all the different types of nozzles. The bronze machines needed for the bronze sprinklers require two operators and can produce up to 12,000 sprinklers. The plastic injection molding machine needed for the plastic sprinklers requires four operators and can produce up to 200,000 sprinklers. Three bronze machines and only one injection molding machine are available.

What are the capacity requirements for the next four years? (Assume that there is no learning.) (Enter the demand values in thousands. Round your answers to 2 decimal places.)
Solution in form of table
Table 1
Year 1 Year 2 Year 3 Year 4
Plastic
Demand for plastic sprinklers 97000 115000 136000 141000
Percentage of capacity used 48.5% 57.5% 68% 70.5%
Machine requirements 1 1 1 1
Labor requirements 4 4 4 4

Bronze
Demand for bronze sprinklers 21000 24000 15000 34000
Percentage of capacity used 175 200 125 283.3333
Machine requirements 2 2 2 2
Labor requirements 4 4 4 4
Question 2

Expandoave, Inc., is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering two options. The first is a small facility that it could build at a cost of $6 million. If demand for new products is low, the company expects to receive $10 million in discounted revenues (present value of future revenues) with the small facility. On the other hand, if demand is high, it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million. In either case, the probability of demand being high is 0.40, and the probability of it being low is 0.60. Not constructing a new factory would result in no additional revenue being generated because the current factories cannot produce these new products.

a. Calculate the NPV for the following: (Leave no cells blank – be certain to enter “0” wherever required. Enter your answers in millions rounded to 1 decimal place.)
Solution
Note I have use a time rate of one year to calculate Npv
Plans NPV
Small facility 1.32 million
Do nothing 0 million
Large facility -1.06 million
b. The best decision to help Expando is to produce with small capacity because as we can see from NPV, it will incur a positive NPV. On the other hand production on large facility the company will face loses since Npv is negative
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