Managerial Accounting - Chapter 10

Evaluation of Proposed Capital Investments

Tanashi Corporation's board of directors met to review a number of proposed capital

investments that would improve the quality of company products. One production-line manager

requested purchasing new computer-integrated machines to replace the older machines in one

of the ten production departments at the Tokyo plant. Although the manager had presented

quantitative information to support the purchase of the new machines, the board members

asked the following important questions:

1. Why do we want to replace the old machines? Have they deteriorated? Are they

obsolete?

2. Will the new machines require less cycle time?

3. Can we reduce inventory levels or save floor space by replacing the old machines?

4. How expensive is the software used with the new machines?

5. Will we be able to find highly skilled employees to maintain the new machines? Or can

we find workers who are trainable? What would it cost to train workers? Would the

training disrupt the staff by causing relocations?

6. Would the implementation of the machines be delayed because of the time required to

recruit and train new workers?

7. How would the new machines affect the other parts of the manufacturing systems?

Would the company lose some of the flexibility in its manufacturing systems if it

introduced the new machines?

The board members believe that the qualitative information needed to answer their questions

could lead to the rejection of the project, even though it would have been accepted based on the

quantitative information.

1. Identify the board members' questions that can be answered with quantitative information.Give an example of the quantitative information that could be used to answer each of the questions.

2. Identify the questions that can be answered with qualitative information.Explain why this information could negatively influence the capital investment decision even though the quantitative information suggests a positive outcome.?