BA5001 / BA5001X    Business Decision-Making

Planning and control of capital expenditure

BA5001 / BA5001X    Business Decision-Making

Final coursework:              Lamberts Heating

Submission date:               Friday 24th May 2013
This coursework is worth 40% of your final mark for this module.
Lamberts Heating has two main divisions: one manufacturing radiators and the other installation of central heating systems. The manufacturing arm of the company makes radiators for domestic and commercial central heating systems.  These radiators are either used by Lamberts installation division or are sold to other central heating installation companies. Lamberts Heating has rather old machinery, presently used to manufacture the radiators, that it wants to replace. The company wants both the new machinery to be in place as soon as possible and to plan the procurement and installation as soon as possible. The company has yet to decide which piece of new machinery to buy and thus does not expect to make an order for this machinery before 3rd June 2013.
Lamberts Heatings installation division supplies and fits domestic central heating systems. It uses its own radiators to obtain the materials for this, but buys in boilers and pipes from other companies. This company is keen to increase its profit margin in this division but the business of supplying domestic heating systems is very competitive at present. The company has decided that the best way to increase its profit margin is to reduce the cost of buying the boilers from a number of suppliers. It has conducted some research into the prices charged by three major suppliers: Apex Boilers, Brunswich Heating Supplies and Centrale.
This coursework is in three parts. You should submit all three parts together as one document.
The first part of the document will consist of three reports: one for each part of the coursework with three appendices. These appendices will contain all the details for the work you have completed in order to write the reports. All computer input and output should also be in the appendices, as should the details of any other calculations you have made.
Part A: Planning and control of capital expenditure
Question / Tasks
The senior management of the Lamberts Heating are considering the replacement of one of the firm’s machines that is used to make radiators in the factory. You are one of the managers involved in this decision. You have had some discussions with other members of the senior management about this proposed investment and there appear to be three machines that the firm could purchase.
Either a:
1.     Alumier machine, a straight replacement for the present machine from the same supplier
2.     Big EZ machine from an American supplier
3.     Cial machine from Japan
The senior management team wish to carefully consider the alternatives. As a first step, it was decided to accurately estimate each of the alternative’s cash flows and the following estimated figures are available:

             Alumier    Big EZ Cial     




              £       £              £
Initial Outlay   500,000 500,000 500,000
Cash inflows Year 1   50,000 200,000 150,000
  2   100,000 150,000 150,000
  3   150,000 150,000 150,000
  4   150,000 50,000 150,000
  5   150,000 25,000 100,000
  6   170,000 25,000 50,000
      770,000 600,000 750,000

The other members of the management team have asked you to consider each of the above alternatives, using the various methods usually employed in appraisal of capital investment decisions. You have been asked to report back to the whole team at their next meeting. Whilst other members at this meeting are also aware of usual investment appraisal methods, your report is expected to assess the above alternatives in any way that you consider is appropriate. Your report will be expected to include your recommendation of the machine to purchase, a recommendation that the team can then consider at their next meeting. Your report will also be expected to include an explanation of the strengths and weaknesses of the various methods that you have utilised in your investment appraisal. A 10% discount rate has also been recommended, the yield for each machine is expected to be calculated separately, and it is acceptable for all calculations to be worked out on a pre-tax basis.
(50 Marks)
1.     All references and books, etc., consulted must be included, including any internet sites used.
2.     You are also expected to produce this assignment using information technology. Particularly expected for this part of the assignment would be the use of Microsoft Word and Excel, or the use of other similar word-processing and spreadsheet software to produce this coursework.
A successful assignment (in Part A of this assignment) might include consideration or explanation of:
§  consideration of each of the alternative proposals under at least three methods of evaluating capital investment decisions
§  comparison of the inflows and outflows for each machine under each method
§  the objective(s) of each method
§  the advantages and disadvantages (strengths and weaknesses) of each of these methods
§  consideration of any non-financial factors which may have to be considered
§  consideration of any other information you may require
§  a recommendation of one of the proposals, including the reasons for your recommendation
§  use of the expected word-processing and spreadsheet software
Note:     The above is illustrative, covering only the main points of the assignment.
Suggested length:  1,250  words
This part of the assignment (Part A) represents 50% of your marks on this piece of coursework

Part B: Scheduling the installation of the new machinery

Having decided to buy a new piece of machinery to make the radiators, Lambert Heating now has to consider the timeframe for getting the new piece of machinery up and running. This will involve you developing the project plan in terms of determining the critical path and the sequencing of the relevant activities.
The activities involved are shown in the table below with their preceding activities and their normal durations. Some of the activities can be reduced in time by using extra staff but this is at an extra cost.  The minimum duration for each activity is shown in the final column. For a number of activities, the minimum duration is the same as the normal duration as the duration of these activities cannot be reduced.
The earliest that the company expects to start the process is Monday 3rd June 2013

Activity   Normal Duration in weeks Preceding activity Minimum Duration
[Each day saved cost £200]
A: Order new machinery 2 None 2
B: Plan new physical layout of factory 3 None 3
C: Determine changes needed in existing machinery 3 None 3
D Receive new equipment 10 A 8
E Hire new employee to supervise the operation of the new machinery 7 A 6
F Make changes needed to accommodate new machinery 15 B 13
G: Make changes needed in existing machinery 9 C 7
H: Train existing employees to use new machinery 7 D,E 6
I: Install new machinery 4 F 3
J: Disassemble old machinery 5 G 4
K: Conduct employee safety training on new installation 2 H,I 2

Please note that the company works a 5 day week:  Monday to Friday.
You may complete this task manually or by using MS project.
·            Assuming that the project starts on Monday 3rd June 2013, determine the shortest duration for the entire project, using the normal duration times.  Specify the date at which the project can finish and the number of weeks required.
·            Produce a Gantt chart showing the starting and finishing times of each activity
·            Identify which activities form the critical path(s) of the project.
·            If the project could be speeded up by a maximum of 3 weeks at a cost of £200 a day, where should this money be spent?  Produce a new network diagram to show the new critical path(s) and total duration.
Give details of the proposed calendar of works, making it clear which activities are critical and which activities have some slack. This section should be written so that the management can understand the advice being given without reference to the work in the appendix. Give details of the starting date, the finishing date and the duration of the project.
Explain how, by spending more money, the project duration can be shortened. Explain which activities have been shortened and which activities are now critical. Give details of the starting date, the finishing date and the duration of the project. Give details of the extra cost involved in shortening the project.
A successful assignment (Part B of this assignment) should include:
§   Determining the shortest time in which the project can be completed using the “normal” durations
§   Determining the shortest time in which the project can be completed using the “minimum” durations
§   Producing a well-written, well-structured report that enables management to understand how to schedule the project. This report should include details of activities which must be completed on time and those for which there is some slack.
§   The costs of shortening the project time should be included in the report as should the relevant start and finishing dates.
Note:     The above is illustrative, covering only the main points of the assignment.
Suggested length:  500  words
This part of the assignment (Part B) represents 20% of your marks on this piece of coursework.
Part C:  Cost of procuring boilers
This part of the coursework requires you to use linear programming techniques to determine the best way to minimise the cost of supplying boilers to Lamberts Heating
As well as manufacturing radiators (as mentioned in Part A), Lamberts Heating is also reviewing the way it procures boilers to enable the installation of domestic heating systems.
The purchasing department has identified three possible suppliers of boilers; Apex, Brunswich and Centrale. It has also identified five kinds of domestic boiler that it wants to purchase so it can supply and fit these boilers to a variety of sizes of homes.
The five boilers are known and coded by Italian numbers as most are manufactured in Italy ; Uno (1), Duo (2), Tre (3), Quattro (4) and Cinque (5).
The table below gives the cost of each boiler (in £s) from each supplier. The final row of the table specifies the minimum requirement of each type of boiler per year. Please note that not all boilers are available from each supplier.

  Uno Duo Tre Quattro Cinque
Apex 500 750 300 450
Brunswich 725 320 875 420
Centrale 480 775 310 900
(number of boilers)

There are certain limitations that have to be taken into account;
·        Apex can supply no more than 1,000 of the Tre boiler each year.
·        Brunswich can supply no more than 800 of the Duo boiler each year.
·        Centrale can supply no more than 1,800 Uno boilers each year.
Lamberts Heating wants to meet its requirement for the number of boilers needed each year at the minimum cost.
You are expected to use MS Excel software for this task. However, we will accept printouts from any other Linear Programming software.
·        Define the meaning of any decision variables you are using.
·        Formulate the situation described above as a linear programming problem.
·        Include your computer input of the problem (and show any formulae used)
·        Include the “Answer Report” and “Sensitivity Report” printouts
Write a brief report to the management of Lambert Heating detailing the cheapest way of meeting their need for boilers.
This report, written in a formal style of English, should include:
·        The nature of the problem being solved
·        The suggested purchasing plan
·        The cost of the suggested purchasing plan.
·        The robustness of the plan. Provide details of the ranges of costs of boilers from each suggested supplier for which your suggested plan remains optimal, and advise the company when they will have to generate a new plan. Do not just provide lists but consider your answers in the context of the question.
·        At present, Apex can supply no more than 1,000 of the Tre boiler each year. If this limit was changed so that Apex could now supply 1,100 Tre boilers, explain what effect this would have on the total minimum cost?
A successful assignment (for Part C of this assignment) should include:
§  Well-defined decision variables and a correct formulation of the problem.
§  Appropriate use of Excel (or other software) to produce a solution to the problem.
§  Producing a well-written, well-structured report that enables management to understand how to procure boilers at the minimum price. This report should include details of your suggested purchasing plan and the cost of this plan.
§  The advice to management should also enable them to determine the range of prices for each boiler for which your purchasing plan is valid.
§  The implications of the increased capacity to supply by Apex should be clearly described.
Note:     The above is illustrative, covering only the main points of the assignment.
Suggested length:  500  words
This part of the assignment (Part C) represents 30% of your marks on this piece of coursework.

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