You have graduated with a business degree, and you have worked for three years for a small management consulting firm. Ivan Steeger (1352 Bull Run Road, Milltown, OR 97111) is a client who has been involved with several businesses in the past. He expects to be the major provider of equity capital for a new mail-order low-fat cookie business. His co-owners, who have baking expertise and a talent for developing recipes, will run the business.
The owners are about to meet to determine what equipment they will purchase for the business. Ivan gives you the following information about the business and their plans:
• Ivan will be providing about 25% of the financing; the remainder will be debt. Ivan will probably have to give his personal guarantee for much of the debt. The exact amount of debt will depend on the price of the equipment they decide to purchase.
• They expect business growth of about 20% for each of the first five years.
• All of the equipment has an expected life of at least five years. They will definitely purchase mixing and baking equipment. They must decide whether to add equipment that will shape cookies automatically, or hire employees to do the shaping.
• They also must decide what capacity they prefer in their initial equipment purchase.
Smaller-capacity equipment would handle their expected demand for the first two years, operating eight hours a day. Equipment with twice the capacity would cost approximately 50% more.
Ivan asks for recommendations about discussion items for the meeting.
Required
Write Ivan a letter in which you suggest major issues the owners should consider in making decisions about investments in equipment. You can assume that Ivan has some understanding of business terminology.