Case Study 3

AMD Construction Company: Negotiating the OldFashioned Way. Capital Equipment Acquisition Process Capital equipment acquisition is a long term investment decision that affects almost every aspect of a firms financial bottom line. Thus the acquisition decision has greater significance that includes tax planning purposes which translates into savings in the long term when equipments are bought now instead of later. Equipment acquisition is also a major undertaking because a significant amount of a firms money is invested with the hope that this will translate into returns that will extend over several years. The process of capital equipment acquisition includes the following steps: The process starts with a wish list of the particular department for which the acquisition is going to be performed. In this step, the capital request is forwarded to the related persons to tell them about the requirement of the department. The request is then compared with the overall company goals and its benefits for the long run are justified. Project planning is made by analyzing the extent of the acquisition and whether it is for replacement, expansion of new products or expansion of existing line of products. After the request passes the new project ideas step, consideration of cash flow analysis are made for each capital investment idea. The important fact here is the net economic

benefit that the investment will generate is considered and evaluated, including the physical life and economic life of the project. The certainty and uncertainty factors are considered in this step for the use of the equipment. The project is selected by the management. The selected project is then analyzed to make the financial planning. In this level if the selected plan is not suitable for the company in any aspect then the company goals are again compared with the acquisition plan and otherwise initiation of the plan is done. When the funds are allocated and approved then the implementation is triggered by the purchase of the assets. Lastly, the budget allocated is rechecked with the actual expenditure of the acquisition. The auditing process for the acquisition is done to check the pros and cons of the acquisition plan and then the results are compared between the actual performances of the plan with the estimated performance to justify its benefits.

Assessment and recommendation for AMD Construction (ATTACHED EXCEL) The estimated values for leasing the equipment shows the lowest cost of operation for the business, with the lease option of CAT-1, the cost will be $391,500 and for the purchase option the estimated values will be $436,107. However, the fact that Jane said the new CAT-1 can easily produce two times the rate of your current equipment. Whats more, the CAT-1 requires only one two-person crew, definitely makes it a great investment.

Because of the DBE that is going to be provided by Ms. Jane, AMD construction will get an extra (10%) for the equipment lease with the decrease in the direct labor cost. The outright purchase option is not suitable enough for the AMD construction because after my calculations, the numbers are far larger than the lease option. The nature of work that Mr. Reed does is based on yearly contracts that are not always guaranteed, thus the lease option offered by Jane will translate into No maintenance costs Labor is lower and same as buying option No down payment Salvage value of 100,000 after 3 years

For the long term and effective investment (assuming that the DBE discount will be around for at least a year) the best option AMD construction will be to lease the equipment. direct purchase is not the best option, however the lease option will be better (AMD made a previous mistake that totaled $344,000) than the existing equipment because the new equipment cuts the labor cost, is efficient and is twice productive than the old equipment. In the long run, Mr. Reed will benefit and AMD construction will be more profitable. I think he should take Janes offer, however as always he has to check what the competition is offering.

References Benton, W.C. Jr. (2010), Purchasing and supply chain management (2nd edition), New York, NY: McGraw-Hill Irwin.