Evans and Blackmores Decision Making - Assignment Example

It should be noted that as the acquisition of the new machine will entail discarding the old, all options will benefit from the revenue of selling the old machine. Due to equity considerations, this report opted to disregard the salvage value of the three machines on the sixth year. Since the salvage value of Models B and C cannot be determined, it is more rational to omit the revenue to be derived from the future sale of the machines. The payback period is one of the simplest ways in ascertaining the feasibility of an investment.

This tool is used to determine the length of time that the company can recoup its cash outlay. Table 1 shows the computed payback period for the three options. Quantitative analyses show that Model C or the machine from France is the best choice as it has a relatively shorter payback period of 3 years and an NPV of 16,455. However, using the qualitative information supplied by the managers of Evans and Blackmore Model C is the worst choice as the company will be incurring a high training cost together with the lack of local maintenance firm to service the machine.

The last factor mentioned is seen to erode the cost savings generated from the machine. It is irrefutable that maintenance services for a machine is very important as it will help the company fully realize the expected gains from Model C. In case of defects, it can be seen that the costs associated with finding a foreign maintenance firm to restore the machine can offset the high NPV and cause disruption in operation. This report recommends that Evans and Blackmore choose Machine A or the machine from USA.

Model B is ruled out as it generates a negative NPV. The rationale of the choice is that Model A has a positive NPV though significantly lower compared to Model C. The presence of a local firm to maintain the machine is a significant advantage.2.0 Make or Buy Decision The quantitative analysis of the make or buy decision faced by Evans and Blackmore is shown in Table 3. It can be seen that the increase in labor cost coupled with the decrease in material costs brought down the per unit cost to 51.94. The computed values are for 8000 units of component X.

Table 3 shows that manufacturing 8000 units of component X will entail the company 415,520 while buying will give a cost of $480,000 ($400,000 for the components and $80,000 for stockholding.)Table 3. Make or Buy Decision This report favors the in-house production of component X instead of outsourcing it. The cost of manufacturing the component is relatively lower as shown in the above computation (Table 3). Another important consideration is the stockholding cost associated with outsourcing.

It should be noted that the demand for component X is stable and there is even a possibility that