Kls Steel Company

I. EXECUTIVE SUMMARY

As an additional incentive for our customers to patronize our steel products, we have chosen to provide them special services, one of which is the cold-drawn steel. However, certain equipments are necessary to be able to produce such a product. At present, we have in our hands a 57-year old draw bench which has a bad reputation of consuming too much energy, of producing a lot of rejects and of needing too many costly repairs.

While it may seem unnecessary for us to invest in a department that we do not specialize on, we must also consider that offering the Cold-drawn steel (CDS) is our competitive advantage; it is our differentiation strategy from our competitors. Giving up this service may displease our customers and sever ties that took us years to build. You, as president, have suggested buying from an outside and reselling the CDS. However, based on the comparative income analysis between these two alternatives, producing the CDS ourselves will yield $5,000 more income per year. It is then recommended that we continue our operations in the CDS department.

Thus, we need to address the production inefficiency problem of this department. As mentioned earlier, the roots of the problem are the aging equipment. At this point, we have to choose between repairing the equipment or replacing it with a new one, once and for all. An evaluation of the Net Present Value and Internal Rate of Return approach show that investing money on the acquisition of a new draw bench will yield greater returns than our cost of capital (10%). Moreover, the payback period approach shows that we would be able to gain back our initial investment at the end of 6 years and 2 months - a far cry from the equipment's total useable life of more than 50 years.

We also need to take a look at the qualitative factors that have an impact in our decision. First, we have to assess if the purchase of a new draw bench will contribute to our firm's future plans. Our long-term goal is to build strong, profitable customer relationships, and we can only do this by providing customer solutions, which are cold-drawn steel. It is therefore recommended that we purchase a new draw bench, as it is in line with our strategy to develop the CDS department. After all, we do not want to be branded as laggards in the industry, we must keep up with practical improvements in technology, for in the end, both our customers and our company benefit from it.