Introduction Robert Smiles has recently been hired as the CEO of Business Machines, Inc. Previously he had been the mar

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Introduction
Robert Smiles has recently been hired as the CEO of Business
Machines, Inc. Previously he had been the marketing manager
for a large manufacturing company and had established a reputation
for identifying new consumer trends. Business Machines Inc.
is a California-based high speed industrial printers manufacturing
company. The company is well known for manufacturing large,
heavy-duty high speed industrial printers at a reasonable
cost. One of its greatest achievements is that its high speed
industrial printers can be easily modified or customized for
different applications.
The company is considering an expansion of its current product
line to include high-efficiency printers. Mr. Smiles feels
that due to high energy prices, consumers will be more willing to
consider purchasing new efficient printers.
Profile of Business Machines
Business Machines, Inc. was established by the Smith brothers in
1880 as the Logging Saw Company. The firm started
manufacturing large steam saws to serve the logging industry which
processed lumber. Their customers were construction companies that
provided housing for the population increase in California.
The Smith brothers quickly realized that the times were
changing. They started looking for the technologies that
would keep them at the forefront of their field of business.
In 1915, the Smith brothers decided that they needed to make high
speed industrial offset machines as replacements for the
saws. They realized that the logging industry was not viable
anymore and that high speed industrial printers were starting to
serve the same purpose.
The company started making high speed industrial printers in the
early 1950’s. Business Machines then opted to produce
commercial printers. It was an easy decision to make since
the two products would use common parts and the customers were
local hospitals, schools, and governments. Starting in the
1950’s the commercial appliances business accounted for about 50%
of Business Machines’ revenues.
The high-efficiency printers
Mr. Smiles arranged a meeting with the firm’s top management and
the chief design and the chief manufacturing engineers to propose a
new product. Mr. Smiles presented an argument that more
individuals in the United State and Canada would be willing to
purchase newer high-efficiency printers with the energy star rating
because people are becoming more environmentally conscious.
The new high-efficiency printers are more efficient and
environmentally friendlier. Also, the recent increase in
electricity costs seems to be long lasting. This is an
opportunity to get people hooked on environmentally friendly
appliances as he put it.
The proposal under consideration is for the introduction of new,
energy star high-efficiency printers. To distinguish Business
Machines from other manufacturers, the proposal included details
about the quietness of operation that need to be developed.
Mr. Phillips and Mr. Lopez, the two engineers, enthusiastically
and quickly pointed out that the needed technology could be based
on the company’s high speed industrial printers. The
framework currently used for building the high speed industrial
printers can be modified to work for appliances at a low
cost. The marketing vice president, Mr. Chen, pointed out
that the marketing analysis could be done quickly and at a
reasonable cost. At this point, Mr. Smiles charged the
participants in the meeting to produce a financial plan for the
development and production of the high-efficiency printers.
Consumer Home Printing
Most people purchase ink jet printers and keep them for a very
long time or until they stop working. Recently, most computer
companies started educating people about the efficiency of new
printers and began offering rebates on the most efficient consumer
models. These approaches increased public interest. This
renewed the public’s interest in low ink-consuming printers.
The decision
Three weeks later, the vice presidents presented the sales and
cost forecasts shown in the exhibits. The information
presented contains the cost of production, financing information,
and warranty cost estimates. In addition, there were two
options for the print head in the high-efficiency printers.
The PC – 004 is more expensive to install, but has a lower warranty
cost. The TP – L12 is cheaper to install, but has a higher
warranty cost. Which print head should be used?
The analysis
Mr. Smiles noticed that there is an abundance of enthusiasm
about entering the high-efficiency printers building business, but
his cautious nature made him seek a more neutral analyst.
This is your responsibility. You have been hired by Business
Machines to analyze the proposal to build the high-efficiency
printers and provide recommendations to Mr. Smiles. The
issues that need to be addressed in your report are the
following:
Cost of debt = 6.5% (since company's
debt is at the high end of debt range) WACC= kd*Wd*(1-t) + ke * We
= 6.5%*1/3 * (1- 35%) + 8.25%*(2/3) = 6.91% So Discount factor =
1/(1+ Discount rate) = 1/1.0691 = 0.9353