Capital equipment

Discuss

• There are 4 types of buyers:– Consumer product buyer– Industrial product buyer– Resale product buyer– Service buyer

• Give examples of items these buyers purchase

Type of purchases

• Capital equipment• Production materials• MRO (Maintenance, repair, operating

supplies)

Capital investment purchase

• Centralized purchase• Decided by buy centre• The greater the technical nature, the greater

the influence of technical staff

Capital equipment

• Capital investment items– Durability, productivity, tangibility– E.g. Buildings, plant, machines, tools, furnishing

and fitting etc

• Factors to consider when buying capital equipment

• New or used equipment

Factors influence buying capital equipment

• Purpose• Flexibility – can it be used for other purpose?• Spares• Compatibility• Reliability• Durability• Cost of maintenance• Cost of operation etc (Page 466 – 467)

New or used equipment?

• Efficiency?• Price?• Guarantee?• Credit terms?• Less maintenance?• Government finance?• Availability of repair parts? Etc (Page 469)

Financing the acquisition

• Straight buy• Hire purchase• Leasing

Lease or buy?

• Operating factors– Trial period?

• Legal factors– Terms and conditions

• Financial factors– Opportunity cost of capital– “How to work out whether it is best to lease or

buy” – see page 473

Selecting suppliers

• Technical factors – The greater the technical nature and complexity,

the higher the influence of technical staff – Technical evaluation (Page 475)– Weighting factors (Page 476)

• Cost factors– Extra cost, e.g. insurance, terms of payment etc

Evaluating capital investment

Techniques• Payback• Average rate of return• Discounting• Net present value(NPV)

Payback approach

• Time required for cash returns to equal the initial cash expenditure

• Example 13.2, page 477

Average rate of return

• Annual rate of depreciation– (Cost – residual value) / Lifespan(Years)

• ROCE = Average annual profit after depreciation/Capital invested

Net present value (NPV)• A higher return if “Sum of the discounted cash flows” > initial investment

Read page 479

Discuss

• Identify and assess capital equipments purchase techniques for ‘DimS’. (Table B)