Evaluation of Proposed Capital Investments

C 1. The board of directors of the Tanashi Corporation met to review a number of proposed capital investments that would improve the quality of company products.

One production-line manager requested the purchase of new computer integrated machines to replace the older machines in one of the ten production departments at the Tokyo plant. Although the manager had presented quantitative information to support the purchase of the new machines, the board members asked the following important questions:

1. Why do we want to replace the old machines? Have they deteriorated? Are they obsolete?

2. Will the new machines require less cycle time?

3. Can we reduce inventory levels or save floor space by replacing the old machines?

4. How expensive is the software used with the new machines?

5. Will we be able to find highly skilled employees to maintain the new machines? Or can we find workers who are trainable? What would it cost to train workers? Would the training disrupt the staff by causing relocations?

6. Would the implementation of the machines be delayed because of the time required to recruit and train new workers?

7. How would the new machines affect the other parts of the manufacturing systems? Would the company lose some of the flexibility in its manufacturing systems if it introduced the new machines?

The board members believe that the qualitative information needed to answer their questions could lead to the rejection of the project, even though it would have been accepted based on the quantitative information.

1. Identify the questions that can be answered with quantitative information. Give an example of the quantitative information that could be used.

2. Identify the questions that can be answered with qualitative information. Explain why this information could negatively influence the capital investment decision even though the quantitative information suggests a positive outcome.