Happyland Construction Inc Essay Example

has compiled a detailed breakdown of expenses for both options. The CEO, purchasing manager, and finance director will make the final decision in an upcoming meeting.

Systematic Issues: - Happyland management needs to make a major decision to invest in the crane for the next 10 years. They must ensure that the company will have enough projects and resources to cover the cost of this capital investment. - The accounting system at Happyland currently depreciates assets over a 5-year period. However, there needs to be a special adjustment made to account for the acquisition of the Gargantulift 6000 crane, whether it is bought or leased. This asset should be depreciated over a 10-year period instead of five. Qualitative Analysis:

Happyland has become a world leader in designing and constructing oil shale plants. The company is currently constructing a new plant and needs to acquire a large lift crane for its operations at the new facility. All the technical, engineering, and administrative departments agree on the brand name, model, and duration of the needed crane. The high cost of the crane requires careful consideration from senior management on whether to purchase it directly from the manufacturer or subcontract it from another company over a 10-year timeline. The purchasing department has prepared a detailed list of the crane's total cost of ownership for the next 10 years. Additionally, the costs of leasing the crane were estimated for comparison. Senior management must choose the option that is both cheaper and more appropriate, considering factors such as asset management, maintenance, finance rates, company liquidity, operating expenses, supplier relations, and present and future conditions. Quantitative Analysis:

Betty,

a purchasing section staff, compiled a list of expenses related to the acquisition or rental of the crane lift. The total cost of ownership (TCO) for purchasing entails various components: a purchase price of $11,000,000; travel costs for assessing different crane models and initial training for operators ($170,000); annual maintenance expenses over 10 years ($50,000); yearly operating costs (excluding salaries and benefits for operators) amounting to $100,000; operators' annual salaries and benefits totaling $200,000; a significant overhaul needed after 5 years costing $400,000; and the residual value of the crane after 10 years set at $500,000. The cumulative expenses for these items over a decade reach $14,570,000. With a 5% discount rate factored in for future monetary value considerations, the total cost reaches $15,298,500.

Furthermore,

the total ownership costs associated with subcontracting the crane lift are itemized as follows: annual lease charges of $1,5000,

The total cost of subcontracting crane lifts, which includes the annual salaries and benefits for crane operators, over a span of 10 years is $17,000,000.

The options for Happyland management include subcontracting the crane or leasing it from Digger Construction. Subcontracting the crane offers the advantage of fixed installments for the next 10 years, regardless of interest rate fluctuations. However, buying the crane is a cheaper alternative.

Happyland has the option to maintain the status quo and not acquire the crane. This decision has both advantages and disadvantages. One advantage is that it will save resources allocated for purchasing or leasing. However, a potential disadvantage is that Happyland may lose its competitive edge in business operations, potentially resulting in a decrease in market share.

Recommendation and

Implementation: It is recommended that Happyland purchases the Gargantulift 6000 from Mega Corporation and finalizes the finance deal with a local bank institution. The company's growth requires staying updated with changing markets to maintain a competitive edge. Upgrading facilities and equipment will encourage clients and potential customers to engage with Happyland, potentially establishing it as a major player in the design and construction industry in Canada and internationally. Two key considerations when finalizing the purchase deal are securing the lowest finance rate over a 10-year period.

- Change the depreciation period for the crane in the accounting books from 5 years to 10 years.

Monitor and Control: Happy land's management must ensure that the crane operates at full capacity. This can be achieved by conducting regular meetings between the engineering, design and construction, and administrative departments. Additionally, the finance department should ensure that loan payments for the crane are made on time to maintain a good relationship with the creditor bank and uphold a positive credit rating. It is important to keep records of scheduled maintenance and operational condition of the crane to ensure its proper functioning. Lastly, maintaining a strong professional relationship with Mega Corporation and seeking their guidance on crane operation and advancements in the field is crucial.