This case examines an equipment purchase decision as faced by a small food preservatives manufacturing company. The text is a description of a meeting between four managers concerned with the decision and presents their evidence to the management committee together with their personal views as to which of two alternative machines ought to be bought. No conclusion is reached in the case.
Some notes on the Rochem Ltd case exercise
The equipment purchase decision in general
It is unusual for facilities to be chosen on one criterion only. For example, if a piece of equipment is needed immediately and only one model or make is available without considerable delivery delays, then the criterion of availability has predominated.…show more content… The range of capability could also be an important factor, that is, how adaptable, flexible or general does the machine have to be? This will depend on how accurately we can predict the future use to which the machine will be put.
Financial criteria – costs
Cost is clearly a major financial criterion for choosing between machines. There are, however, two aspects of the cost of any facility: the initial cost and the total life cycle cost. The initial cost is its basic purchase price.
Sometimes limitations on the amount of capital available could eliminate some alternatives which, although may be good investments, require more initial capital than the company can afford. The total life cycle cost includes the cost associated with acquiring, using, caring, development, design, production, maintenance, replacement and disposal; as well as all the support, training and operating costs generated by the acquisition.
Financial criteria – benefits
The benefits which accrue from investing in machinery cannot always be described accurately in financial terms, but indirectly always reflect in financial performance. Benefits are usually expressed in profit terms or saving terms, whichever is more appropriate to the particular decision. Any sensible measure of benefit can be used provided all alternatives are assessed on the same criteria. The timing of benefits can also be important.
A useful method of comparing costs