CASE 49 ALPINE PRESS background "There are 8,264 different types of errors you can make in a printing job," Jim Crandall has been heard to say. "And over the years I guess I've made nearly every one twice over." Crandall is the owner of Alpine Press, a company with annual sales of nearly S8 million. The firm does a wide range of printing, including annual reports, organizational brochures, even wedding invitations. He purchased the firm in 1976 when there were 16 emplowees and the business occupied 100 square feet. Now, 20 years later, there are 65 employees, and the business occupies 35,000 square feet Crandall has always stressed quality printing and has even been known to redo projects that customers were perfectly satisfied with. He feels strongly that "if it's not as good as we can do, we redo it." name par t THE PROBLEM to Crandall now faces a decision about replacing a printing press, the Miller, named after its manufacturer. Though the machine is 15 years old, this is not necessarily "ancient" for equipment of this sort. Still, the Miller has been "chewing up maintenance time the last few years. As a result, not only have maintenance costs been increasing, but the machine's down time has been increasing as well. Though the Miller has been able to achieve its production target of $500,000 of sales per year, Crandall is certain this volume will not be maintained. Exhibit I shows estimates of the annual sales he expects from the Miller over the next seven years. After reviewing these figures, he even wonders if they aren't a bit generous, especially in the later years Crandall is nearly certain the machine should be replaced and has man rowed the choice to two models: the Akivama, which is made in Japan, and the German-manufactured Heidelberg, With a decision like this there are often fac tors other than cool that influence the choice. Will the machine be experthy installed? It is vital that a press be firmly level because the error tolerance in a typical job is in thousandths of an inch. Does a manufacturer offer professional assistance in press operation? A new piece of equipment requires employee training, and it is necessary that a producer offer operator assistance during the first few weeks after a sale. Does a manufacturer offer prompting maintenance support? The equipment must be examined twice a year to min mize the chance that problems will arise, and if a malfunction does occur, Grandall wants the machine repaired as quickly as possible. However, the technical support of each firm is excellent and Crandall feels these factors are "a wash." Nor is there much to choose from on the basis of annual operating costs. (See Excubit 2.) For example, two workers are required to nn either press. An operator feeds the ink and paper into the machine, while a pressman adjusts the equipment for the type of printing being done. The Heidelbers, though, because it is a bit bigger and more expensive, will require more space, increase the firm's annual insurance premium, and cost somewhat more to maintain. These increases, however, are relatively small. The real differences involve each machine's contribution to annual sales and reo purchase price. The Akiyama is essentially a modern replacement of the Miller. Purchase of the Akiyama in effect allows Alpine to maintain sales at current lev- els. Looked at from a different angle, Crandall realizes that his predictions on the Miller imply a reduction in sales, and it is possible that if the Miller is kept he would be unable to fill orders from existing customers. LOODD E research deprece Sour THE HEIDELBERG'S SUPERIORITY The Heidelberg does everything that the Akiyama can do and more. The most sig- nificant difference is that the Heidelberg can be run at a much faster speed than the Akiyama. This is important because customers frequently want their orders filled very quickly. Virtually all presses can be run at faster rates, but the Heidelberg's speed is legendary in the graphics business. At present Alpine's capacity to fill quick orders in-house is limited relative to the number of requests received. Onders are often farmed out to another graphics company, mainly as a service to Alpine's customers, and Alpine only breaks even on this type of business woon If the Heidelberg is purchased, all work of this sort could be done in-house. In addition, Crandall would promote more heavily the fim's ability to take quick orders, and that service should increase annual sales. The Heidelberg's sales figures in Exhibit 1 include estimates of annual quick-order sales. Crandall is less confident about these predictions, however, since they involve estimates of future sales increases. cost. The cost of the Akiyama is $100,000, which includes installation. The base price of the Heidelberg is $880,000 and also includes installation. Both manufac turers provide the same guarantee and offer free operator assistance during the first four weeks after the sale. As Crandall reflects on the choice, a number of difficulties come to mind. If he stays with the Miller he will likely use it for the remainder of its economic life, seven years. He is also likely to keep the Akiyama that long as well, at t which time he would replace it. The Heidelberg is a different story, however. If purchased, Alpine would probably use this press for its entire useful life, esti- mated to be 25 years. And Crandall is unclear whether or how to incorporate tha thus longer period into the analysis. Crandall thinks it is reasonable, based on conversations with weder equipment brokers and his own expertise, that the current after tax market value of the Miller is $45,000, and that the Akiyama's after-tax market value in seven years will be $120,000. He is unsure, though, what the value of the Heidellers will be at that time. This press has only been manufactured for three years and there is virtually no data on its resale value. Crandall believes, however, that the cost of this machine new will rise by 4 percent a year. Futh may have a connection with regale votre ANOTHER PROBLEM The second problem involves Alpine's project evaluation technique. For all equipment decisions, both large and small, Alpine has used the payback method. Crandall like the payback for two reasons. First, it is simple and easy to use. Alpine's management must make numerous equipment-related deci sions during the course of a vear, and convenience is an important factor Crandall also views a project's payback as a measure of the project's risk. He views a short payback as an indication of relatively low risk. Crandall luas asked Denise Molton to help him in the evaluation. Molton has an undergraduate degree in marketing and an MBA in finance. A recent hire, she divides her time between sales and finance, and she has already contributed important ideas to the firm's marketing and finance policies. When they meet, Crandall hands Molton a list of questions he wants answered. 1. Is the payback an appropriate evaluation tool for all projects? 2. Should the same technique be used to evaluate low-cost and "big-ticket" items? 3. (A) Is it necessary to estimate the market value of the Heidelberg in seven years given that it would probably be used for 25 years? (b) If "yes" is given to the preceding question, how can a reasonable esti mate of market value be obtained? 4. Use whatever financial techniques are appropriate to evaluate which, if either of the two printing presses should be purchased. Back at her office, Molton reflects on some issues she thinks are relevant to her assignment. She decides that a 40 percent tax rate is appropriate, but she is a bit unclear on what discount rates to use. Molton is comfortable using a 10 percent after-tax rate to evaluate a simple cost-reduction project. She realizes that the printing presses involve sales projections and, thus, are projects of higher risk. She also thinks that the Heidelberg is a riskier investment than the Akiyama. Her first mnction is to use a 12 percent after tax rate on the Akiyama and a 14 percent rate on the Heidelberg. She believes, however, that rates of 14 and 16 percent respectively could also be right and secretly hopes that her choice of discount rates will not affect any recommendation on the printing presses. Torty EXHIBLT 1 Annual Sales Estimate for Ench Press Your + 1 1997 1998 1999 2000 2001 2002 2003 Miller S180.000 150.000 Akm S500. 300.000 Heidelberg S600.000 600.000 Ter ? Avond om? 400.000 500 600.000 400.000 0 600.000 100.000 200.00 600.000 400.000 0.00 0.000 100.000 0.00 500.000 conglom abd EXHIBIT 2 Estimated Annual Cash Operating costs of Each Press Alhuma Hedeherg seratina labor $63,511 565,511 3.276 4.160 Pension fund Welfare benefits Payroll taxes Utilities Maintenance Fire & sprinkler insurance Rent $65,511 3.276 4.160 6,551 1,842 38,500 1,760 2.000 $123,600 1.142 9,000 1.760 22.000 590.000 4.160 6.551 1.902 14.400 2870 200 SI01,400 One operator at $29.964 per your plus one pressman at $5 . Five percent of labor. Health disability and life insurance premiums. Social Security and unemployment insurance Charge for space cupied by each machine These figures do not include material costs, which run 10 percent of saks Assumptions in discussion - Exchange rate - Location of company (mastenance cose) - slupping - Include asyrs Caler . CASE 49 ALPINE PRESS background "There are 8,264 different types of errors you can make in a printing job," Jim Crandall has been heard to say. "And over the years I guess I've made nearly every one twice over." Crandall is the owner of Alpine Press, a company with annual sales of nearly S8 million. The firm does a wide range of printing, including annual reports, organizational brochures, even wedding invitations. He purchased the firm in 1976 when there were 16 emplowees and the business occupied 100 square feet. Now, 20 years later, there are 65 employees, and the business occupies 35,000 square feet Crandall has always stressed quality printing and has even been known to redo projects that customers were perfectly satisfied with. He feels strongly that "if it's not as good as we can do, we redo it." name par t THE PROBLEM to Crandall now faces a decision about replacing a printing press, the Miller, named after its manufacturer. Though the machine is 15 years old, this is not necessarily "ancient" for equipment of this sort. Still, the Miller has been "chewing up maintenance time the last few years. As a result, not only have maintenance costs been increasing, but the machine's down time has been increasing as well. Though the Miller has been able to achieve its production target of $500,000 of sales per year, Crandall is certain this volume will not be maintained. Exhibit I shows estimates of the annual sales he expects from the Miller over the next seven years. After reviewing these figures, he even wonders if they aren't a bit generous, especially in the later years Crandall is nearly certain the machine should be replaced and has man rowed the choice to two models: the Akivama, which is made in Japan, and the German-manufactured Heidelberg, With a decision like this there are often fac tors other than cool that influence the choice. Will the machine be experthy installed? It is vital that a press be firmly level because the error tolerance in a typical job is in thousandths of an inch. Does a manufacturer offer professional assistance in press operation? A new piece of equipment requires employee training, and it is necessary that a producer offer operator assistance during the first few weeks after a sale. Does a manufacturer offer prompting maintenance support? The equipment must be examined twice a year to min mize the chance that problems will arise, and if a malfunction does occur, Grandall wants the machine repaired as quickly as possible. However, the technical support of each firm is excellent and Crandall feels these factors are "a wash." Nor is there much to choose from on the basis of annual operating costs. (See Excubit 2.) For example, two workers are required to nn either press. An operator feeds the ink and paper into the machine, while a pressman adjusts the equipment for the type of printing being done. The Heidelbers, though, because it is a bit bigger and more expensive, will require more space, increase the firm's annual insurance premium, and cost somewhat more to maintain. These increases, however, are relatively small. The real differences involve each machine's contribution to annual sales and reo purchase price. The Akiyama is essentially a modern replacement of the Miller. Purchase of the Akiyama in effect allows Alpine to maintain sales at current lev- els. Looked at from a different angle, Crandall realizes that his predictions on the Miller imply a reduction in sales, and it is possible that if the Miller is kept he would be unable to fill orders from existing customers. LOODD E research deprece Sour THE HEIDELBERG'S SUPERIORITY The Heidelberg does everything that the Akiyama can do and more. The most sig- nificant difference is that the Heidelberg can be run at a much faster speed than the Akiyama. This is important because customers frequently want their orders filled very quickly. Virtually all presses can be run at faster rates, but the Heidelberg's speed is legendary in the graphics business. At present Alpine's capacity to fill quick orders in-house is limited relative to the number of requests received. Onders are often farmed out to another graphics company, mainly as a service to Alpine's customers, and Alpine only breaks even on this type of business woon If the Heidelberg is purchased, all work of this sort could be done in-house. In addition, Crandall would promote more heavily the fim's ability to take quick orders, and that service should increase annual sales. The Heidelberg's sales figures in Exhibit 1 include estimates of annual quick-order sales. Crandall is less confident about these predictions, however, since they involve estimates of future sales increases. cost. The cost of the Akiyama is $100,000, which includes installation. The base price of the Heidelberg is $880,000 and also includes installation. Both manufac turers provide the same guarantee and offer free operator assistance during the first four weeks after the sale. As Crandall reflects on the choice, a number of difficulties come to mind. If he stays with the Miller he will likely use it for the remainder of its economic life, seven years. He is also likely to keep the Akiyama that long as well, at t which time he would replace it. The Heidelberg is a different story, however. If purchased, Alpine would probably use this press for its entire useful life, esti- mated to be 25 years. And Crandall is unclear whether or how to incorporate tha thus longer period into the analysis. Crandall thinks it is reasonable, based on conversations with weder equipment brokers and his own expertise, that the current after tax market value of the Miller is $45,000, and that the Akiyama's after-tax market value in seven years will be $120,000. He is unsure, though, what the value of the Heidellers will be at that time. This press has only been manufactured for three years and there is virtually no data on its resale value. Crandall believes, however, that the cost of this machine new will rise by 4 percent a year. Futh may have a connection with regale votre ANOTHER PROBLEM The second problem involves Alpine's project evaluation technique. For all equipment decisions, both large and small, Alpine has used the payback method. Crandall like the payback for two reasons. First, it is simple and easy to use. Alpine's management must make numerous equipment-related deci sions during the course of a vear, and convenience is an important factor Crandall also views a project's payback as a measure of the project's risk. He views a short payback as an indication of relatively low risk. Crandall luas asked Denise Molton to help him in the evaluation. Molton has an undergraduate degree in marketing and an MBA in finance. A recent hire, she divides her time between sales and finance, and she has already contributed important ideas to the firm's marketing and finance policies. When they meet, Crandall hands Molton a list of questions he wants answered. 1. Is the payback an appropriate evaluation tool for all projects? 2. Should the same technique be used to evaluate low-cost and "big-ticket" items? 3. (A) Is it necessary to estimate the market value of the Heidelberg in seven years given that it would probably be used for 25 years? (b) If "yes" is given to the preceding question, how can a reasonable esti mate of market value be obtained? 4. Use whatever financial techniques are appropriate to evaluate which, if either of the two printing presses should be purchased. Back at her office, Molton reflects on some issues she thinks are relevant to her assignment. She decides that a 40 percent tax rate is appropriate, but she is a bit unclear on what discount rates to use. Molton is comfortable using a 10 percent after-tax rate to evaluate a simple cost-reduction project. She realizes that the printing presses involve sales projections and, thus, are projects of higher risk. She also thinks that the Heidelberg is a riskier investment than the Akiyama. Her first mnction is to use a 12 percent after tax rate on the Akiyama and a 14 percent rate on the Heidelberg. She believes, however, that rates of 14 and 16 percent respectively could also be right and secretly hopes that her choice of discount rates will not affect any recommendation on the printing presses. Torty EXHIBLT 1 Annual Sales Estimate for Ench Press Your + 1 1997 1998 1999 2000 2001 2002 2003 Miller S180.000 150.000 Akm S500. 300.000 Heidelberg S600.000 600.000 Ter ? Avond om? 400.000 500 600.000 400.000 0 600.000 100.000 200.00 600.000 400.000 0.00 0.000 100.000 0.00 500.000 conglom abd EXHIBIT 2 Estimated Annual Cash Operating costs of Each Press Alhuma Hedeherg seratina labor $63,511 565,511 3.276 4.160 Pension fund Welfare benefits Payroll taxes Utilities Maintenance Fire & sprinkler insurance Rent $65,511 3.276 4.160 6,551 1,842 38,500 1,760 2.000 $123,600 1.142 9,000 1.760 22.000 590.000 4.160 6.551 1.902 14.400 2870 200 SI01,400 One operator at $29.964 per your plus one pressman at $5 . Five percent of labor. Health disability and life insurance premiums. Social Security and unemployment insurance Charge for space cupied by each machine These figures do not include material costs, which run 10 percent of saks Assumptions in discussion - Exchange rate - Location of company (mastenance cose) - slupping - Include asyrs Caler