The owner of a small printing company is considering the purchase of additional

Question

The owner of a small printing company is considering the purchase of additional printing equipment to expand her business. If the owner expands the business and sales are high, projected profits (minus the cost of the equipment) should be $90,000; if sales are low, projected profits should be $40,000. If the equipment is not purchased, projected profits should be $70,000 if sales are high and $50,000 if sales are low.

1.Are there options other than the purchase of additional equipment that should be considered in making the decision to expand the business?

2.If the owner is optimistic about the company’s future sales, should the company expand by purchasing the equipment?

3.Is the owner’s optimism or pessimism about sales the only factor that may impact the company’s profits?

4.The equipment to be purchased is known in the industry to have a useful life of five years. How might this impact the printing company?

Explanation / Answer

1. Purchase of the additional equipment is the only feasible option in order to expand the business.

2. If the owner is optimistic about the company’s future sales, the company should expand by purchasing the equipment. The reason is that optimistic outlook indicates that the company would make $90,000 profit instead of $70,000 with expansion in place.

3. No, the life of the equipment and the minimum required of return should also considered in the decision making process. Also the funding of the purchase would impact the minimum required of return.

4. This would enable us to estimate the proceeds from the overall use of the equipment over its lifetime.

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