Rob Thorton is a member of the planning and analysis staff for Thurston, Inc., an established manufacturer of frozen foods. Rick Ungerman, chief financial officer of Thurston, Inc., has asked Thorton to prepare an analysis of net present value for a proposed capital equipment expenditure that should improve the profitability of the southwestern plant. This analysis will be given to the board of directors for expenditure approval. The plan calls for the replacement of a number of forklift trucks and operators with a computer- controlled conveyor belt system that feeds directly into the refrigeration units. This automation would eliminate the need for a number of materials handlers and increase the output capacity of the plant.
The forklift trucks have been fully depreciated and have a zero net book value. If the conveyor belt system is purchased now, these trucks will be sold for $ 100,000. Thurston has a 40 percent effective tax rate, has chosen the straight- line depreciation method, and uses a 12 percent after- tax discount rate. For the purpose of analysis, all tax effects and cash flows from the equipment acquisition and disposal are considered to occur at the time of the trans-actions, whereas those from Several years ago, as director of planning and analysis, Ungerman was instrumental in convincing the board to open the southwestern plant. However, recent competitive pressures have forced each of Thurston's manufacturing divisions to consider alternatives to improve their market position. To Ungerman's dismay, the southwestern plant may be sold in the near future unless significant improvements in cost control and production efficiency are achieved. Operations are considered to occur at the end of each year.
When Thorton completed his initial analysis, the proposed project appeared quite healthy. However, after investigating equipment similar to that proposed, he discovered that the estimated residual value of $ 850,000 was very optimistic; information several vendors had previously provided estimates this value to be $ 100,000. He also discovered that industry trade publications considered eight years to be the maximum life of similar conveyor belt systems. As a result, he prepared a second analysis, based on this new information. When Ungerman saw the second analysis, he told Thorton to discard this revised material, warned him not to discuss the new estimates with anyone, and ordered him not to present any of this information to the board of directors. Show all work- to how you got your answers. A. Accurately describe the decision problem facing Thorton. B. What alternatives does he have? C. What is the best alternative from a quantitative analysis? D. What other qualitative factors should be considered and why?