Hawthorne Plastics Project Case Study Solution
If they don’t test, which of the three Processes should Hawthorne implement during the eighteen months following the Pynes contract?
If Hawthorne do not test the incoming batch of the resin each month, out of three processes, Hawthorne should implement the process two as the net present value of the manufacturing process two of producing the plastic strapping is higher than that of the process one and process three. As the setup cost in the process two and process 3 included the cost of performing the test of $200, the amount is deducted from setup cost, assuming that Hawthorne would not test the batch of the resin. After deducting the cost of performing the test, the net present value of process 1, 2 and 3 would be $1828, $3040 and $2889 respectively.
If they do test, which of the three Processes should Hawthorne implement when the test results are positive during the six months of the Pynes contract?
If Hawthorne do test the incoming batch of the resin each month, and the results of the test are positive during the 6 month out of three processes, Hawthorne should implement the process two as the net present value of the manufacturing process two of producing the plastic strapping is higher than that of the process one and process three. As Hawthorne do the test, the setup cost in the process two and process 3 included the cost of performing the test of $200, the amount would not be deducted from setup cost. The net present value during the six months of the Pynes contract of process 1, 2 and 3 would be $5044, $9830 and $8213 respectively.
If they do test, which of the three Processes should Hawthorne implement when the test results are negative during the six months of the Pynes contract?
If Hawthorne do test the incoming batch of the resin each month and the results of the test are negative, out of three processes, Hawthorne should implement the process one on the ground that the process one involves low cost of totaling $20200 which is considerably lower than the expenditures of process two and three. It is because of the fact that the results of test are negative which means that the batch are not suitable for the high quality plastic strapping, and spending higher amount on the process during the short span of six months would not be a wise decision at all.
If they do test, which of the three Processes should Hawthorne implement when the test results are positive during the eighteen months following the Pynes contract?
If Hawthorne do not test the incoming batch of the resin each month and the results of the test are positive during the 18 month, out of three processes, Hawthorne should implement the process two as the net present value of the manufacturing process two of producing the plastic strapping is higher than that of the process one and process three. As Hawthorne do the test, the setup cost in the process two and process 3 included the cost of performing the test of $200, the amount would not be deducted from setup cost. The net present value during the six months of the Pynes contract of process 1, 2 and 3 would be $1828, $3029 and $2878 respectively. On the basis of the positive test results and greater NPV under process two, Hawthorn is suggested to implement the process two.
If they do test, which of the three Processes should Hawthorne implement when the test results are negative during the eighteen months following the Pynes contract?
If Hawthorne do test the incoming batch of the resin each month and the results of the test are negative, out of three processes, Hawthorne should implement the process three on the ground that the period is 18 months and the process three involves low cost of totaling $25300 which is considerably lower than the expenditures of process two. It is because of the fact that the results of test are negative which means that the batch are not suitable for the high quality plastic strapping, but Hawthorne should spendconsiderable amount of money on the process during the long span of eighteen months. Hawthorne is not recommended to implement process one because of its characteristic of providing the average quality and during the long span of eighteen months, he should implement the process that would guarantees the high quality strapping with low cost of expenditures.
For the recommended strategy, which inputs have the biggest impact on NPV?
For the recommended strategy, the major factors or inputs which impacts the net present value for the period includes the discount rate and the cash flows. The higher the discount rate, the lower the present value of the cash flows for the period and vice versa. Due to the higher discount rate, the deeper the cash flows of the company get discounted for the period, which in turn results in the lower net present value. So, the change in the discount rate last significant impact on the cash flows and ultimately lead to increase and decrease in net present value in the future.
Conduct sensitivity analyses. If a key variable or two happen to end up very high or very low, but still within the range of possible values, how might that change the recommended strategy?
The sensitivity analysis is performed with low discount rate of 0.287 and high discount rate of 0.687 for each month under all three processes. Under the low discount rate, the net present value of process two is still higher than the net present value of process one and process three. On the other hand, with high discount rate of 0.687, the net present value of process two is still higher than the net present value of process one and process three, due to which there would not be a significant changes in the proposed strategy of implementing process two as the process is capable enough of producing the high quality strapping. Furthermore, if the discount rate changes higher or lower, the process would generate higher net present value to the company.......................................
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