105capital equipment
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Capital equipment
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Discuss
• There are 4 types of buyers:– Consumer product buyer– Industrial product buyer– Resale product buyer– Service buyer
• Give examples of items these buyers purchase
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Type of purchases
• Capital equipment• Production materials• MRO (Maintenance, repair, operating
supplies)
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Capital investment purchase
• Centralized purchase• Decided by buy centre• The greater the technical nature, the greater
the influence of technical staff
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Capital equipment
• Capital investment items– Durability, productivity, tangibility– E.g. Buildings, plant, machines, tools, furnishing
and fitting etc
• Factors to consider when buying capital equipment
• New or used equipment
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Factors influence buying capital equipment
• Purpose• Flexibility – can it be used for other purpose?• Spares• Compatibility• Reliability• Durability• Cost of maintenance• Cost of operation etc (Page 466 – 467)
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New or used equipment?
• Efficiency?• Price?• Guarantee?• Credit terms?• Less maintenance?• Government finance?• Availability of repair parts? Etc (Page 469)
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Financing the acquisition
• Straight buy• Hire purchase• Leasing
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Lease or buy?
• Operating factors– Trial period?
• Legal factors– Terms and conditions
• Financial factors– Opportunity cost of capital– “How to work out whether it is best to lease or
buy” – see page 473
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Selecting suppliers
• Technical factors – The greater the technical nature and complexity,
the higher the influence of technical staff – Technical evaluation (Page 475)– Weighting factors (Page 476)
• Cost factors– Extra cost, e.g. insurance, terms of payment etc
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Evaluating capital investment
Techniques• Payback• Average rate of return• Discounting• Net present value(NPV)
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Payback approach
• Time required for cash returns to equal the initial cash expenditure
• Example 13.2, page 477
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Average rate of return
• Annual rate of depreciation– (Cost – residual value) / Lifespan(Years)
• ROCE = Average annual profit after depreciation/Capital invested
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Net present value (NPV)• A higher return if “Sum of the discounted cash flows” > initial investment
Read page 479
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Discuss
• Identify and assess capital equipments purchase techniques for ‘DimS’. (Table B)