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PURCHASING CAPITAL

EQUIPMENT
SOUKAT NANDI
MHA 2nd Sem.
Content:
Introduction.
Significant Differences.
Consideration of Evaluation of BIDs.
Purchase of Used Equipment.
Sources of Used Equipment.
Reference. 

Introduction:
 The purposes of purchase capital
equipment is usually differentiated
both in producers & policies from
the purchase of consumption
materials mainly because of the
nature of large investment over a
long duration.

Significant Differences:
 1.Negotiating Time:
 With the increase in the number of
contracts & available alternative sources,
negotiating time varies greatly &
generally ,it greater than that for other
purchases.
 2.Sources Availability:
 Due to specific & stringent requirement
of engineering & design feature , sources
are limited. Therefore , the purchase
decisions are made on the basis of
urgency of requirements &rather than on
Cont…
 3.Size of Expenditure:
 Since this criterion greatly influences
manufacturing capability , availability finance
& cost of capital weighs more with top-
management.
 4. Lead Time Requirement:
 A unique features in the purchase of capital
equipments is the lead time required for a
supply. Through very few equipments are
standardized , most of the major equipments
are custom built & require sufficient lead time
for the suppliers to fabricate or manufacture &
deliver.

Consideration of Evaluation of
BIDs:

1.Operating Characteristics &
Engineering Features:
 The production & or user department
generally establishes the need & defines
the functions which form the very basis of
it’s performances characterizes & design
features , & the selection has to be made for
the one which is best suited to the existing
process.
  

2.Economic Analysis of the
Investment:
 Pay back Period Method:
 Most simple & widely used method. The
length of time required for cash inflow as a
result of investment is calculated. The
equipment or machine which has a shorter
useful life must pay for itself is the theme
behind it. Shorter the payback period, the
better the investment from the economic
viewpoint. The formula is-
 t=C/I 
 T=Time payback period.
 C=Initial Capital outlay.
 I=Inflow of Cash including depreciation.

Disadvantages:

Uniform cash inflow each year & it can’t


handle varying annual cash inflow.
It ignores profit earned after the recovery
of the initial investment.

Return on Investment:
The methods of measuring this is –
ROI=I/C

Where,

I=The average inflow of cash after deduction of

taxes.
C=original Capital Outlay.

 Limitations are-
Estimate approximate rate of return on
investment.
Does not give a true picture of the periods
during which the investment actually
generate revenue.
 
Internal Rate of Return
Method:
 It is the procedure to find a rate of
investment equal to the present value of the
cash proceeds expected from an investment.
The formula is-
 C=R1/1+r+R2/(1+r)2+R3/1+r3…Rn/
(1+r)n+S/(1+r)n
 where,

 C=Initial capital outlay on investment.

 r=r is the discounted rate of return.

 R ,R ,R …R are the cash inflowover the


1 2 3 n
years value of the investment at the end of n years.
Discounted Cash Flow(DCF)
Method:
 It is using the present value concept in
evaluating an investment , all future
revenues are discounted in order to find out
the total present value of the future earnings
& compared with the present value of
investment. It means a rupee earned today
is worth more than a rupee earned
tomorrow. Similarly it means a rupee earned
in future years is less than a rupee earned
today.

3.Qualitative Consideration:

Reliability of supplier in producing quality


products & standing behind his
guarantees.
Financial soundness of suppliers &
operations.
Services rendered by the suppliers such as
demonstration service.
Installation & commissioning.
After sales service.
Replacements of parts.
 


Purchase of Used
Equipment:
 Used equipment purchased in preference to
a new equipment because of economic
consideration.

Sources of Used Equipment:

Directly from owner.


Used equipment dealers.
Brokers & Auctioneers.

Reference:
P.Gopalakrishnan & M.Sundaresan-Materials
management an Integrated Approach.
Gupta Shakti & Kant Sunil(2004)-Hospital
Stores Management, an Integrated
Approach.
Dutta A.K- Integrated Materials management

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JAI HO