10-2 Scenario Analysis: Printing Equipment The owner of a small printing company

Question

10-2 Scenario Analysis: Printing Equipment

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.

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

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

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

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

a) other option is not to by the printing equipment beacuse after buying if sales remain low then it will be much lower then the profit after not purchasing.

b) yes if the owner is optimistic then should buy the equipment and it the risk which the owner will take

c) no, the other method can be predicting the sale by seeing the sales in past and how much growth in last month we have seen.

d) the company needs to be very productive to use the machine efficiently in its usefull life of 5 years otherwise it can become a source of loss for the company

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