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CHAPTER 4
PRODUCT DESIGN PROCESS
Problems
Period Cash Flow -333 -333 -633 -338 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013 1013
PV Year 1 r = 8 -333 -327 -609 -318 935 917 899 881 864 847 831 814 798 783 767 752
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Product Design Process
b. The results are shown below for both scenarios. If sales are only 50,000 then the project is still
worthwhile since the NPV decrease to Rs6,759,000. If Tuff Wheels has under estimated the sales and it
ends up being 70,000 per year then NPV will increase from Rs8,503,000 base case to Rs10,247,000 with
the higher sales rate.
Period Cash Flow -333 -333 -633 -338 838 838 838 838 838 838 838 838 838 838 838 838
PV Year 1 r = 8 -333 -327 -609 -318 774 759 744 729 715 701 687 674 660 647 635 622
Period Cash Flow -333 -333 -633 -338 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188 1188
PV Year 1 r = 8 -333 -327 -609 -318 1097 1076 1054 1034 1014 994 974 955 936 918 900 882
c. The impact of changing the interest rate is shown below. There is still a positive NPV but it shrinks the
interest rate increases. This would be expected since a higher the interest rate reduces the present value of
future cash flows.
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Chapter 4
a. In the base case the Patay2 Chip Project has a very good NPV of Rs10,460,000, see below.
Period Cash Flow -5,000 -5,000 -9,000 -17,000 20,125 20,125 7,375 7,375
PV Year 1 r = 12 -5,000 -4,762 -8,163 -14,685 16,557 15,768 5,503 5,241
b. Additional 10 million for higher price is clearly worthwhile as it raises the NPV from Rs10.46 million to
Rs16.654 million. See results below.
Period Cash Flow -7,500 -7,500 -11,500 -19,500 26,375 26,375 11,125 11,125
PV Year 1 r = 12 -7,500 -7,143 -10,431 -16,845 21,699 20,666 8,302 7,906
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Product Design Process
c. Reduced sales estimates have a significant impact on the NPV. It reduces the NPV all the way down to
Rs10,000. The success of the Patay2 Chip is very dependent on the sales estimates. It would be wise for
Perot to make sure that there is sufficient demand for Patay2 Chips.
Period Cash Flow -5,000 -5,000 -9,000 -17,000 16,000 16,000 4,750 4,750
PV Year 1 r = 12 -5,000 -4,762 -8,163 -14,685 13,163 12,536 3,545 3,376
Project NPV 10
3. Answers will vary based upon the product selected and the student. Issues that should be considered in
the design and manufacture of a product include design process (traditional vs. concurrent
engineering), customer needs and expectations, legal considerations (EPA, OSHA, etc.), service life,
reliability, appearance, standardization, any industry standards that should be considered (e.g.,
television set and the type of signal received from stations), method of shipment, material cost and
availability, stage of the product life cycle, design for manufacturability, design for assembly,
packaging, environmental, unit cost, pricing, availability of purchased material, availability of
capacity, availability of subcontractors, setup cost, manufacturing time, volume, and expected product
life.
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Chapter 4
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Product Design Process
5. This can be a fairly extensive assignment depending upon the amount of research students do into
paddle manufacturing. Without doing any library or field study on the production process, students
should be able to come up with a solution approximating the one given below.
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Chapter 4
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Product Design Process
To Circular
To saw To hand saws
Saws
Cut from
Cut to size Cut handle
plywood
To glue
Wait for
main piece
Glue
Inspect
Lacquer
Dry
Glue rubber
surfaces
Inspect
To packing
Put in
plastic bags
Box for
shipment
To finished
goods
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Chapter 4
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Product Design Process
Capacity of final assembly line = 160 units/hour X 8 hours/day X 5 days/week = 6,400 units/week.
The capacity of the entire process is 5,600 units per week, with assembly line 1 limiting the
overall capacity.
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Chapter 4
The capacity of the entire process is 8,000 units per week, with drilling machines limiting the
overall capacity.
The capacity of the entire process is 9,600 units per week, with final assembly machines limiting t
he overall capacity.
Cost per unit = Total cost per week/Number of units produced per week
= Rs14,510/8,000
= Rs1.81
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Product Design Process
Cost per unit = Total cost per week/Number of units produced per week
= Rs17,166/9,600
= Rs1.79
Let X = the number of units that each option will produce. When the company buys the units, the
cost is Rs3.00 per unit (3X). When it manufactures the units, they incur a fixed cost of Rs120,000
(4 drilling machines at Rs30,000 a piece) and a per unit cost of Rs1.81. Therefore, 120,000 +
1.81X is the cost of this option. Set them equal to each other and solve for X to determine the
breakeven point.
3X = 120,000 + 1.81X
X = 100,840 units.
Therefore, it is better to buy the units when you produce less than 100,840, and better to produce
them when demand is greater than 100,840 units.
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