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

a) Other than purchasing the equipment, the available option could be buying it on a rent or a lease and then check how much the projected costs and profits are impacted.

b) If the owner is expecting the sales to go up (i.e have a higher chance to make high projected profits) then the owner shoul;d definitely purchase the equipment.

On purchase : Expected earnings = 90000 p + 40000 (1-p)

Not purchasing : Expected earnigns = 70000 p + 50000 (1-p)

Thus, if p > 0.5, then purchasing makes a lot more sense.

c)

Apart from the optimism about sales, other factors that might affect the company's bottomline are the overheads, maintenance and repairs, and other expenses attached with it.

d)

Since, the life of the product is only five years, depreciation must be taken into account while calculating the net profits and not just the cost it took to purchase it. Depreciation is an expense that a company must account for while making financial decisions.

Hope this helps.

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