Description

CASE – 3   CHOOSING BETWEEN PROJECTS IN ABC COMPANY

ABC Company, has three projects to choose from. The Finance Manager, the operations manager are discussing and they are not able to come to a proper decision. Then they are meeting a consultant to get proper advice. As a consultant, what advice you will give?

The cash flows are as follows. All amounts are in lakhs of Rupees.

Project 1:

Duration 5 Years

Beginning cash outflow = Rs. 100

Cash inflows (at the end of the year)

Yr. 1 – Rs 30; Yr. 2 – Rs 30; Yr. 3 – Rs 30; Yr.4 – 10; Yr.5 – 10

Project 2:

Duration 5 Years

Beginning Cash outflow Rs. 3763

Cash inflows (at the end of the year)

Yr. 1 – 200; Yr. 2 – 600; Yr. 3 – 1000; Yr. 4 – 1000; Yr. 5 – 2000.

Project 3:

Duration 15 Years

Beginning Cash Outflow – Rs. 100

Cash Inflows (at the end of the year)

Yrs. 1 to 10 – Rs. 20 (for 10 continuous years)

Yrs. 11 to 15 – Rs. 10 (For the next 5 years)

Question:

If the cost of capital is 8%, which of the 3 projects should the ABC Company accept?

Case 5: EASTERN MACHINES COMPANY

Raj, who was in charge production felt that there are many problems to be attended to. But Quality Control was the main problem, he thought, as he found there were more complaints and litigations as compared to last year. With the demand increasing, he does not want to take any chances.

So he went down to assembly line, but was greeted by an unfamiliar face. He introduced himself.

Raj: I am in charge of checking the components, which we use, when we assemble the machines for customers. For most of the components, suppliers are very reliable and we assume that there will not be any problem. When we generally test the end product, we don’t have failures.

Namdeo: I am Namdeo. I was in another dept. and has been transferred recently to this dept.

Raj: Recently we have been having problems, and there has been some complaint or other about the machines we have supplied. I am worried and would like to check the components used. I would like to avoid lot of expensive rework.

Namdeo: But it would be very expensive to test every one of them. It will take at least half an hour for each machine. I neither have the staff nor the time. It will be rather pointless as majority of them will pass the test.

Raj: There has been more demand than supply for these machines in last 2 years. We have been buying many components from many suppliers. We have been producing more with extra shifts. We are trying to capture the market and increase our market share.

Namdeo: We order for components from different places, and sometimes we do not have time to check all. There is a time lag between order and supply of components, and we cannot wait as production will stop. We use whatever comes soon as we want to complete our orders.

Raj: Oh! Obviously we need some kind of checking. Some sampling technique to check the quality of the components. We need to get a sample from each shipment from our component suppliers. But I do not know how many we should test.

Namdeo: We should ask somebody from our statistics dept. to attend to this problem.

As a Statistician, advice what kind of Sampling schemes can we consider, and what factors will influence choice of scheme. What are the questions we should ask Mr. Namdeo, who works in the assembly line?