The manufacturing manager for Modern Manufacturing Company (MMC) is working on a justification for implementing a "Lean/Just-in-time" manufacturing system. No upfront investment will be needed. No revenue changes are forecasted. A team of employees will spend their time training employees and making process changes. The salaries and benefits of the "Just-in-time" staff are shown below for the three years of the project.
A team of employees will spend their time training employees and making process changes. In year 0, $450,000 will be spent preparing the project team for this project. MMC uses straight-line depreciation in project justifications so this $450,000 should be allocated with 3-year straight line depreciation. The salaries and benefits of the "Just-in-time" staff are shown below for the three years of the project. There will not be any change in other S.G.& A. expenses besides depreciation and the JIT team.
Financial gains are expected to be a reduction in the following areas: cost of good sold, inventory, and accounts payable. The data is shown below where each year changes from the previous year by the percentages shown. Note that changes are accumulative where the cost improvements in each year are carried forward into the following years.
Determine the present worth of the project using a MARR of 15% to see if the project is justified. Submit your solution on a spreadsheet.
Data Block
Time Span 3 Years
Year 0 1 2 3
JIT Team costs $450,000 $300,000 $250,000 $200,000
COGS-Reduction per year 7.5% annually
COGS at end of year 0 $3,000,000
Inventory Reduction per year 10% annually
Inventory at end of year 0 $200,000
Accounts Receivable reduction 0% annually
Accounts Receivable at end of year 0 $150,000
Accounts Payable reduction 10% annually
Accounts payable at end of year 0 $100,000
Tax Rate 25% annually
Interest Expense annually $250,000 constant every year
MARR 15%