What Causes Your Auto to Depreciatein Value?

What Causes Your Auto to Depreciatein Value?

Driving it off the lot

Aging: Older cars sell for less (until they become antiques)

Heavy Use: Cars with more mileage sell for less.

Damage: Those dented fenders don’t help.

Obsolescence: Better Cars May Become Available

New Cars with better fuel efficiency.

New Cars with better safety features.

New Cars with more comfortable rides.

New Cars with the latest styling.

Can an auto that is still operating have value equal to its scrap value?

Can an auto that is still operating have value equal to its scrap value?

Sure, cars are often driven to the junk yards.

Because they are• Costly to repair• Not so safe• Not very fuel efficient• Not so fun to drive• Not very reliable• Costly to maintain

IBM System 360 Mod 75Purchase price range from $10.6 million to $16.9 million in today’s dollars

Announced April 22, 1965 and withdrawn March 15, 1977.

The Depreciation of Electronic Computers Is Different from the Depreciation of Your CarThe Depreciation of Electronic Computers Is Different from the Depreciation of Your Car

What Causes Depreciation forElectronic Computers?

What Causes Depreciation forElectronic Computers?

Very Little Depreciation Due to Aging– those electronic parts can last a very long time.

Most of the Depreciation Comes from Obsolescence– Cheaper Computers That Can Perform the Same Function.

– Better Computers That Can Do Things The Older Ones Cannot Do.

The TEM-5 is Like a ComputerThe TEM-5 is Like a Computer

Relatively Little Depreciation Due to Aging– The TEM-5 was only a few years old.

Most of the Depreciation Comes from Obsolescence– The 2A7 was cheaper and could perform similar functions.

– The TEM-5 had a dangerous design.

– The TEM-5 was making an obsolete product.

The Business Value of the Tem-5The Business Value of the Tem-5

1. Ongoing Production Value

2. Future Production Value

3. Interim Production Value

4. Resale Value, or Parts and Scrap Value

4/24/2000TEM-5 Out of Service

7/24/20002A7 Fully Operational

Production TimelineProduction Timeline

1/1/2002Demand Exceeds2A7 Capacity?

InterimProduction

Value

OngoingProduction

Value

FutureProduction

Value

4/24/2000TEM-5 Out of Service

7/24/20002A7 Fully Operational

Production TimelineProduction Timeline

1/1/2002Demand Exceeds2A7 Capacity?

1. Ongoing Production Value

Was the TEM-5 needed in the Fall of

2000, after the move to Mesa

and after the installation

of new equipment?

OngoingProduction

Value

On Going Production ValueWas the Tem-5 Capacity Needed in the Fall of 2000?

On Going Production ValueWas the Tem-5 Capacity Needed in the Fall of 2000?

In the Fall of 1999, SDI ordered two new machines (the 2A7 and 2A8) that could perform the same functions as the TEM-5. - Delivery was scheduled for Spring of 2000

- Each machine had about twice the capacity of the TEM-5

The 2A8 was intended for the TRW Rack and Pinion Program, though this was to be phased out in 2002/2003

The planned levels of production were well within the capacity of the 2A7 alone.

Capacity (thousands per 4-week month)

0

100

200

300

400

500

600

700

800

Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00

TEM-5 TEM9 2A7 2A7+TEM9 2A7+2A8

TEM-5 Capacity

TEM-9 Capacity

2A7 Capacity

2A7 + TEM-9 Capacity

2A7 + 2A8 Capacity

The 2A7 and the 2A8 Added a Lot of CapacityThe 2A7 and the 2A8 Added a Lot of Capacity

Shipments and Capacity (thousands per 4-week month)

0

100

200

300

400

500

600

700

800

Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00

Sales Projected TEM-5 TEM9 2A7 2A7+TEM9 2A7+2A8

TEM-5 Capacity

TEM-9 Capacity

2A7 Capacity

2A7 + TEM-9 Capacity

Actual

2A7 + 2A8 Capacity

Projected

There Was No Ongoing Production Value:The 2A7 Alone Had More Than Enough Capacity

to Handle Demand in the Fall of 2000

There Was No Ongoing Production Value:The 2A7 Alone Had More Than Enough Capacity

to Handle Demand in the Fall of 2000

There Was No Ongoing Production Value:The TEM-5 Capacity Was Not Needed in the Fall of 2000

There Was No Ongoing Production Value:The TEM-5 Capacity Was Not Needed in the Fall of 2000

There was a Honda transition fee of $250,000, but this was never actually charged

SDI knew there was no ongoing production value– No replacement for the TEM-5 was ordered after the

accident.

– Even though it would have been fully paid for by the insurance coverage.

4/24/2000TEM-5 Out of Service

7/24/20002A7 Fully Operational

Production TimelineProduction Timeline

1/1/2002Demand Exceeds2A7 Capacity?

FutureProduction

Value

2. Future Production Value

Would it be a wise business decision

to put the TEM-5 into “mothballs” and

plan to use it again at some time

in the future?

An Example of Future Production ValueAn Example of Future Production Value

When would it make sense to park your old car in the garage for some future use rather than selling it?– Your daughter is 13 and you want her to have the car when

she turns 16.

PROPRO

CONCON

You won’t have to buy her a car in three years

It’s not good for the car to sit there idle all that time, It could cost a lot to get it running well again The car will depreciate in value just sitting there. If you sold the car now, you could invest the money in the

stock market, and, if things go well, you could use the gain to buy a really great car when your daughter is 16.

Important Consideration for SDI PlanningThe 2A8 Could be Used for Future Production

Important Consideration for SDI PlanningThe 2A8 Could be Used for Future Production

In TRW Rack and Pinion Program for which the 2A8 was planned– Phase in 2000/2001

– Phase out 2002/2003

Rack and Pinion Forecast Volumes (MM)2A8 Capacity: 4.5 million per year

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

CY2000 CY2001 CY2002 CY2003 CY2004

Mil

lio

ns

of

Un

its

Forecast 9/10/1999

Excess Capacity

Hypothetical Ramp-up in Demand and Available Capacity

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

Jul-0

0

Oct

-00

Jan-

01

Apr

-01

Jul-0

1

Oct

-01

Jan-

02

Apr

-02

Jul-0

2

Oct

-02

Jan-

03

Apr

-03

Jul-0

3

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Un

its

per

yea

r

2A7 Capacity

2A7 + 2A8 Capacity

Hypothetical Increase in Sales

January 2006More Capacity Needed

The TEM-5 Might Be Needed Againin January 2006

The TEM-5 Might Be Needed Againin January 2006

TEM-5 PlanHypothetical Ramp-up in Demand and Available Capacity

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

Un

its

per

yea

r

2A7 + 2A8 + TEM-5 Capacity

2A7 + 2A8 Capacity

Hypothetical Increase in Sales

January 2006TEM-5 Back in Service

July 2008More Capacity Needed

If the TEM-5 is Brought Out of Moth Balls,Another 2A7 Might be Needed in July 2008If the TEM-5 is Brought Out of Moth Balls,Another 2A7 Might be Needed in July 2008

2A7 PlanHypothetical Ramp-up in Demand and Available Capacity

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

Jul-0

0

Oct-

00

Jan-

01

Apr-0

1Ju

l-01

Oct-

01

Jan-

02

Apr-0

2Ju

l-02

Oct-

02

Jan-

03

Apr-0

3Ju

l-03

Oct-

03

Jan-

04

Apr-0

4Ju

l-04

Oct-

04

Jan-

05

Apr-0

5Ju

l-05

Oct-

05

Jan-

06

Apr-0

6Ju

l-06

Oct-

06

Jan-

07

Apr-0

7Ju

l-07

Oct-

07

Jan-

08

Apr-0

8Ju

l-08

Oct-

08

Jan-

09

Apr-0

9Ju

l-09

Oct-

09

Jan-

10

Un

its

per

yea

r

2A7 + 2A8 + 2A7 Capacity

2A7 + 2A8 Capacity

Hypothetical Increase in Sales

January 2006New 2A7 Delivered

But if a 2A7 Were Purchased, No AdditionalCapacity Would be Needed Until January 2010

But if a 2A7 Were Purchased, No AdditionalCapacity Would be Needed Until January 2010

Should the TEM-5 Be Stored for Use in the Futurewhen Demand Exceeds the Capacity of the 2A7/2A8?

Should the TEM-5 Be Stored for Use in the Futurewhen Demand Exceeds the Capacity of the 2A7/2A8?

PROPRO

CONCON

Allows delay in purchase of an additional 2A7- But if demand continues to increase, additional capacity will eventually be needed.

$457,000 cost to move TEM-5 to Mesa and upgrade it,compared with a fee of $775,000 for the 2A7 which has 80% more capacity - Storage Costs - Safety risks when the TEM-5 is put back in operation. - Various problems with equipment that has been stored for a long time – both mechanical and personnel issues

The TEM-5 Had No Future Production ValueThe TEM-5 Had No Future Production Value

There are no plausible scenarios in which it would make good business sense to keep the TEM-5 in mothballs.– Hardly any upside potential and a lot of downside risk.

Weekly Total MGG/GGGs Production and Capacity: ThousandsSource: SDI-H/567-571

0

20

40

60

80

100

120

140

11/7/1999 11/7/2000 11/7/2001 11/7/2002

Th

ou

san

ds

of

Un

its

MESA

Hollister

TEM-5

2A7

FY 2001 FY 2002 FY 2003

As it turned out, the 2A7 had plenty of capacity to handle the sales volume at least through

the end of fiscal year 2003

As it turned out, the 2A7 had plenty of capacity to handle the sales volume at least through

the end of fiscal year 2003

4/24/2000TEM-5 Out of Service

7/24/20002A7 Fully Operational

Production TimelineProduction Timeline

1/1/2002Demand Exceeds2A7 Capacity?

InterimProduction

Value

3. Interim Production Value

How valuable would it have been to

have had the TEM-5 operating

until the 2A7 was up and running?

Should the Tem-5 Have Been Operated During the Transitional Period, April 2000 – July 2000?

Should the Tem-5 Have Been Operated During the Transitional Period, April 2000 – July 2000?

PROPRO

CONCON

Potential Lost sales Customer Good Will Cost of $9,000 to make the TEM-9 capable of

production during the transition.

Safety Risks for Employees More Expensive to Operate in Hollister ($300,000)

Some Lost Sales, PossiblySome Lost Sales, Possibly

Actual Cumulative Shipments / Projected

91%

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

110%

Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00

Should the Tem-5 Have Been Operated During the Transitional Period, April 2000 – July 2000?

Should the Tem-5 Have Been Operated During the Transitional Period, April 2000 – July 2000?

PROPRO

CONCON

Potential Lost sales Customer Good Will: NOT A BIG ISSUE Cost of $9,000 to make the TEM-9 capable of

production during the transition.

Safety Risks for Employees: A VERY BIG ISSUE More Expensive to Operate in Hollister ($300,000)

How Much Interim Value?How Much Interim Value?

A reasonable solution is the profit from sales that did not occur during that period of time.

This has already been paid.

The Business Value of the Tem-5The Business Value of the Tem-5

1. Ongoing Production Value

2. Future Production Value

3. Interim Production Value

4. Resale Value, or Parts and Scrap Value

NONE

NONE

PAID