(Acquisition of new technology) Balton Industrial Solutions Company supplies var¬ ious manufacturing firms with production technology including conveyor sys¬ tems. One of the company’s most popular products is a conveyor system that is used in bottling operations for various bottled food products. One of the key components of the conveyor system is a mechanical sensor that controls the loading of empty bottles onto the conveyor belt. In the event the sensor is operating outside of normal tolerances, bottles will be unevenly spaced (causing problems in the fill operation such as spilling and partially filled bottles) or bottles will be too tightly packed on the conveyor system causing them to break. Broken glass on the conveyor line is a potentially serious problem in the event the glass shards fall into undamaged bottles and are shipped to customers. Bro¬ ken glass can also cause damage to the conveyor system.

Product managers at Balton believe that the next generation of convevor systems must be equipped with a computer-controlled sensor rather than a me¬ chanical sensor. The defect rate of products produced on conveyor systems using a mechanical sensor is too high relative to customer expectations. The mechan¬ ical sensor is also difficult to adjust when production switches between products that utilize different sized bottles. The company’s production capabilities do not presently extend to production of computerized equipment.

To produce computerized sensors, Balton would be required to invest in new production technology and build facilities to house the production equip¬ ment. Additional costs would be incurred for employee training, research, and product design and development. A secondary cost consideration is the effect of the required investment on the firm’s cost of capital. The capital markets would perceive this type of investment to be more risky than other assets held by the firm, because of the magnitude of the required investment and the firm’s lack of experience in dealing with computer technology. Management has estimated that the cost of capital of the firm would rise by 2.5 percent over its existing level if investment in the computer sensor production equipment is made.

a. Describe for the management of Balton options that they might consider to purchase of the production equipment and technology required to produce computerized sensors. /

b. For options that you identified in part

a, describe the major benefits and risks of each option.

c. Of the options identified in part

a, as well as the option of purchasing the required equipment, which would you recommend? Why?LO2