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Engineering Economics CASE STUDIES Engineering Economics AAGE U. MICHELSEN ISBN 978-87-89359-32-8 Aage U. Michelsen : Engineering Economics 27th edition 2016 Publisher: Bodano Publishing & Communication ApS Copyright © Bodano 2016 Bodano Publishing & Communication ApS Hovedgaden 47 DK 2970 Hørsholm Phone +45 38 74 78 76 www.bodanopub.dk E-mail: [email protected] 2 Foreword This collection of case studies is designed to be used as educational material in the teaching of business economics to engineering students. Many engineering students are primarily interested in the technical disciplines and perceive “economics” as uninteresting and more or less irrelevant to the solution of technical problems. A main objective of this collection of case studies is to illustrate that in business, the economic dimension is highly relevant in the resolution of the vast majority of technical problems. By presenting the economic problems in a tech- nical context, it is hoped that a greater number of engineering students will become interested in economic studies and see the relevance of this. An emphasis has been placed on making the cases realistic, in that they reflect con- crete problems faced by the companies. At the same time, it has been necessary to simplify some of the problems to make them suitable for educational use. In addition, some of the numerical values have been changed for reasons of confidentiality. Most numerical values, however, have the proper order of magnitude. Proposed solutions have been prepared for the numerical problems in the cases, designed to complement textbook theories and models. Some cases also contain discussion portions, which include keywords or keyword-like phrases. In addition, because the case studies are based on concrete business situations, they can provide the basis for broader discussions - for example, regarding the given assumptions and the consequences of alternative assumptions. The author extends a sincere thanks to the employees of the companies that have contributed to the preparation of the case studies. Without their involvement, many of the realistic aspects would have been missing. 3 With respect to the next edition, we welcome comments about the level of difficulty of the problems and selection of topics. These comments should be directed to the book’s author : Master of Science in Engineering Aage U. Michelsen [email protected] 4 Table of Contents Case Solution BERENDSEN TEXTIL SERVICE A/S Capacity Expansion 8 59 ENERGINET.DK Social benefits of investment in a Great Belt power link 12 62 ENERGISTYRELSEN Investing in a heat pump system 16 65 H. LUNDBECK A/S Insourcing – Made Possible by the Reduction of Production Costs 19 68 HALDOR TOPSØE A/S Economic assessments about a new product 24 71 HOFOR A/S Heat pumps for generating district heat 28 74 MT HØJGaaRD A/S Inclusion of Project Earnings in the Company’s Consolidated Financial Statement 34 76 NNIT A/S Financial considerations in an IT company 40 79 A/S STOREBÆLT Annuities with Different Payment-Interval Lengths 44 82 VEJDIREKTORATET Financial considerations regarding the construction of a highway 49 86 VELUX A/S Calculations with the Introduction of New Technology for Windows 53 89 5 6 CASES 7 CASE: BERENDSEN TEXTIL SERVICE A/S Capacity Expansion Berendsen develops and provides innovative service solutions for the rental of linens, clothing, floor mats and hand hygiene. With an annual turnover of 11 billion DKK and 16,000 employees, Berendsen is the market leading service provider in the B2B market in Europe. In Denmark, Berendsen has 1,200 dedicated employees in 16 branches across the country. This means that Berendsen provides linens to large hotel chains, for example. Linens, towels, tablecloths and kitchen clothing – it is Berendsen that ensures that all of this is clean and sanitary, allowing Berendsen’s customers to serve their own customers in the best possible way. The same applies to the hospital world, where it is essential that bedding and staff clothing is ready to use and properly washed. Berendsen has several other divisions, and throughout the company, Berendsen cooperates with its customers to develop new and innovative solutions that benefit their business and raise their level. The following assignment is based on Berendsen’s clothing laundry operation in Aarhus. Demand from the customer segment that consists of food production companies has been soaring in recent years. Today, the demand is 30,000 launde- red clothing articles per day, for which the capacity for the treatment of laundry from that segment is 100 % utilized. Demand over the coming years is expected to increase linearly, so that in 10 years, demand will reach 48,000 laundered clothing articles per day. In the current system, an automated sorting and packaging system is used. The workflow starts with the dirty clothes on a table, which are manually sorted by color and washing temperature, after which they are washed in washing machines. After washing, the washing machines are automatically emptied into a washtub, from which the clothes are then routed to five hanging stations where employees scan the clothes and hang them on hangers. From here, the garments pass into a “steamer” in which they are ironed and dried. Then the clothes move on to a sorting system, where they are scanned and sorted by customer/user and given a rack/shelf sorting 8 CASE: BERENDSEN TEXTIL SERVICE A/S code. The clothes move on to an automatic folding machine that folds the clothes according to customer specifications. Finally, the clothes are packed - depending on customer size - in cages or bags and delivered to the customer the following day by one of Berendsen’s distribution vans. On average, an employee here can treat 120 pieces of laundry per hour. The production can also be performed without the automated sorting and packing system. In this case, all sorting and packing processes are performed manually, and an employee can then on average treat only 80 pieces of laundry per hour. The capacity to treat clothing from the aforementioned segment is, as stated, 100 % utilized, which is why Berendsen is considering two options to expand capacity: A. Expanding only with manual tables, where workers manually sort, fold and pack the laundry. With this solution, the capacity can be gradually increased with increasing demand. B. Expanding capacity by investing in a second automated sorting and packaging system, whereby capacity is doubled. An employee works 1,700 hours per year and 7.5 hours per day. The hourly wage is 200 DKK/hour. The subsequent 10 years are designated as year 1, year 2, ...., year 10. QUESTION 1 Calculate the total increase in labor costs for the next 10 years if the capacity is only expanded with manual tables. QUESTION 2 Calculate how much the total increase in labor costs for the next 10 years will be reduced if capacity is expanded by investing in an automated sorting and packing system. In the following Question 3, it is assumed that the discount rate is 10 % per annum. Furthermore, the rather modest investment cost of the manual tables is ignored. QUESTION 3 If the investment’s dynamic payback period is 5 years, what must have been the amount of investment in the automated systems? Calculate based on this the investment’s static payback period. With the options A and B considered above, work is conducted in one shift. These two options require capacity expansion and therefore a building expansion. 9 CASE: BERENDSEN TEXTIL SERVICE A/S As an alternative to these two options, Question 4 deals with a third option, C. This consists of the capacity expansion achieved through a combination of overtime, Saturday work and working a second shift. This avoids the need for an investment in the expansion of the buildings, but in turn increases the hourly wage paid for the expanded capacity. Here it is assumed that the hourly average wage is simplified to be 240 DKK/hour. QUESTION 4 Calculate the total increase in labor costs for the next 10 years if capacity is expan- ded using option C. QUESTION 5 Based on the existing information and calculations, can you say anything about which of the three options you would recommend to Berendsen, based on economic considerations? Other than economic considerations, are there any other factors that should be considered? Please find the solution on page 59. 10 CASE: BERENDSEN TEXTIL SERVICE A/S INVOLVERING OG INDFLYDELSE ER DU KLAR TIL AT FORFØLGE EN INTERNATIONAL LEDERKARRIERE? Har du et stærkt drive, mod, energi og ambitioner til at tage ansvar for at skabe både forretningsmæssige resultater, trivsel og udvikling for andre mennesker? Så har du en god del af fundamentet for at sætte turbo på din karriere. Dit Management Trainee-program består Det kræver overblik og evnen at kunne af et introforløb på en måned og 4 efter- strukturere sin tid – samt ikke mindst vil- følgende projektforløb på hver ca. 6 må- jen til at yde en ekstra indsats, hvis det er neder. De efterfølgende projektforløb har nødvendigt for at komme i mål. alle det mål at optimere vores forretning. Der er altså ikke tale om skrivebordsøvel- OM BERENDSEN ser, men om projekter, hvis resultater og Berendsen Textil Service udvikler og til- konklusioner vi vil implementere direkte i byder innovative serviceløsninger inden vores drift. for udlejning af linned, beklædning, måt- ter og håndhygiejne. Med en årlig om- Du løser projekterne i tæt dialog med le- sætning på 11 mia. kr. og 16.000 medar- delsen i de afdelinger, du arbejder i, og bejdere er vi markedsledende service- samtidig har du en mentor, som følger udbyder på B2B-markedet i Europa. I dig hele vejen gennem alle projekter – og Danmark er vi 1.200 engagerede medar- som du derfor altid kan sparre med og bejdere fordelt på serviceafdelinger over søge råd hos.
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