Exerciser Machines makes robots that do exercise so you don

QUESTION

Robotic Exerciser Machines makes robots that do exercise so you don’t have to. REM robots have a complex set of servo motors and springs which, when properly fitted, provide an automatic resistance and aerobic exercise program for the customer. Exercise regimes can be programmed for 3 to 50 minutes.REM has recently faced significant price hikes from their spring manufacturer which has caused the management team to consider in-sourcing spring production. They currently purchase 4 sizes of springs which they are purchasing on a fixed price contract guaranteed for the next 5 years:SizeQty. per RobotUnit Price3”203.004”105.005”107.006”513.00The COO and her staff have determined that the machinery needed would fit into an un-used wing of the factory, so no brick-and-mortar investment will be required. Spring manufacturing machinery and equipment will require an investment of $1.2 million. At current volumes, the machinery will be able to produce springs at 15% below current purchase prices. Installation of the equipment is quite involved and will take 12 months from order to first piece production.Annual sales volumes for the REM product is expected to be 8800 next year with average annual growth of 10%.Given a cost of capital of 12% and a 5 year life of the machinery before significant refurbishment is required, what is the Net Present Value and the ROI? (12)Do you recommend that REM make the investment and bring spring production in house? Why? (4)As a member of the management team, what key risks do you see with the recommended course of action? (4)

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