Product Overview

The Tower and Lattice division of Akron Crane Works is considering investing in a small machine shop in order to insource production of a wide range of small parts. The purpose is to lower costs and also reduce lead times. Analyst Peter Tang plans to model this decision by treating the vendor prices as savings and comparing those savings to the cost of internal manufacturing, acknowledging the needed up-front investments. Tang’s supervisor, Tanya Garina, sets the stage for a lively discussion of economic value drivers by expressing initial disdain for the proposal, which, when analyzed, turns out to generate a great deal of value.

Learning Objectives

1) To introduce the concepts of net present value (NPV) and internal rate of return (IRR) as economic value metrics. 2) To build facility with free cash flow calculations, including assumptions related to net working capital (NWC) investment, NWC recovery, and asset salvage value. 3) To explore less direct economic measures such as payback period. 4) To discuss the degree to which modeling needs to be precise to be informative. 5) To develop economic intuition as to the drivers of economic value.