Case: Replacement Decisions

Falconville Pump Company, Inc.

Brandon Joiner, president and chief executive officer of Falconville Pump Company, Inc., has a

potentially serious problem on his hands. The earnings of the firm were essentially flat in $2022$ in

spite of a general upturn in the industry. Now, well into the third quarter of $2023,$ the picture is

even gloomier. FPC$$s performance has continued to deteriorate and, for the first time since $2005,$

a loss was incurred in the third quarter. Unless things improve quickly, it is possible that the

company will show a loss for $2023$ as a whole. This problem is particularly frustrating to Joiner

because it comes on the heels of a report in one of the leading trade journals that rated FPCs

products as superior to those of all competitors in the industry in terms of durability and customer

service.

Falconville Pump Company is a major producer of deep$-$well submersible pumps for

commercial applications, irrigation equipment, and liquid distribution systems. Originally the

company specialized in agricultural systems requiring large pumping volumes and high lift $($wells

over $500$ feet deep$),$ but that segment of the business represents less than $10$ percent of total

sales today. Most of the sales volume for the past five years has been in the areas of sanitation

control systems, chemical and petroleum production, industrial process cooling systems, and

pipeline transportation systems. Although most of the systems are specifically designed for

individual customers, they tend to be constructed from standard modules that can be produced in

volume to realize substantial economies of scale. These systems generally sell in the price range

$$50,000-$$$300,000,$ although it is not unusual to find contracts for several million dollars in pipeline

transportation systems. Historically, most of FPCs sales have been to companies who were

expanding their operations and therefore needed additional capacity. Recently, though, economic

uncertainties have caused the firms to be more cautious in increasing their capacity, and, although

interest rates have fallen substantially, there is a reluctance to assume greater levels of debt for

risky expansion projects. Because of these trends, FPCs major sales target has shifted to

retrofitting and upgrading existing plant and equipment.

Although the original agricultural product line of the company was based on technology

that was substantially more advanced than usually encountered in the industry, the selling skills

required to tailor the equipment to the job were no greater than for other manufacturers. Over the

years, though, the degree of technological sophistication of the various products increased

markedly so that today a high degree of technical expertise is required to match the appropriate