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not used at all in their evaluation. The subjective approach used to evaluate safety projects is a result of the pragmatically difficult task of quantifying the benefits from these projects in dollar terms. Thus, these projects are subjectively evaluated by a management-worker committee with a limited budget. All 8 projects to be evaluated in January are classified as profit projects.
The first set of projects listed on the meeting’s agenda for examination involves the utilization of HPMC’s precision equipment. Project A calls for the production of vacuum containers for thermos bottles produced for a large discount hardware chain. The containers would be manufactured in 5 different size and color combinations. This project would be carried out over a 3-year period, for which HPMC would be guaranteed a minimum return plus a percentage of the sales. Project B involves the manufacture of inexpensive photographic equipment for a national photography outlet. Although HPMC currently has excess plant capacity, each of these projects would utilize precision equipment of which the excess capacity is limited. Thus, adopting either project would tie up all precision facilities. In addition, the purchase of new equipment would be both prohibitively expensive and involve a time delay of approximately 2 years, thus making these projects mutually exclusive. (The cash flows associated with these 2 projects are given in Exhibit 1.)
The second set of projects involves the renting of computer facilities over a 1-year period to aid in customer billing and, perhaps, inventory control. Project C entails the evaluation of a customer billing system proposed by Advanced Computer Corporation. Under this system, all the bookkeeping and billing presently being done by HPMC’s accounting department would be done by Advanced. In addition to saving costs involved in bookkeeping, Advanced would provide a more efficient billing system and do a credit analysis of delinquent customers, which could be used in the future for in-depth credit analysis. Project D is proposed by International Computer Corporation and includes a billing system similar to that offered by Advanced. In addition, an inventory control system that will keep track of all raw materials and parts in stock and reorder when necessary. Thereby, reducing the likelihood of material stockouts, which have become more and more frequent over the past 3 years. (The cash flows for these projects are given in Exhibit 2.)
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EXHIBIT 1
Harding Plastic Molding Company
Cash Flows:
Year Project A Project B
0 $-75,000 $-75,000
1 10,000 43,000
2 30,000 43,000
3 100,000 43,000
EXHIBIT 2
Harding Plastic Molding Company
Cash Flows:
Year Project C Project D
0 $-8,000 $-20,000
1 11,000 25,000
The third decision that faces the financial directors of HPMC involves a newly developed and patented process for molding hard plastics. HPMC can either manufacture and market the equipment necessary to mold such plastics or it can sell the patent rights to Polyplastics Incorporated, the world’s largest producer of plastics products. (The cash flows for projects E and F are shown in Exhibit 3.) At present, the process has not been fully tested, and if HPMC is going to market it itself, it will be necessary to complete this testing and begin production of plant facilities immediately. On the other hand, the selling of these patent rights to Polyplastics would involve only minor testing a