Restore Incorporated was organized in 1975 by Ted Schadler and his son, Bob.

The company restored classic and antique cars in terms of both body and engine work. The company was located in a large southeastern U.S. city and drew customers from at least a 300-mile radius. Restore had ten employees. Ted and Bob occasionally worked on the shop floor, but they served primarily as president and controller, respectively. The company began as an extension of Ted Schadlers hobby, fixing up old cars for himself and his friends. As the hobby grew, a shop was acquired, and soon there was more work than could be handled by one person. It soon became necessary for Schadler to decide whether he would pursue the business full-time to earn a living, doing something he really enjoyed. As the business grew and Schadler's reputation as a reliable, expert restorer became known, the usual need for controls and attention to financial matters became evident. It was that set of circumstances which presented an opportunity for Bob Schadler, a recent graduate of a highly reputable university accounting program, to join the company as controller. Initially, Bob and his dad performed a great many of the tasks on the shop floor-Bob had picked up knowledge of engine repair while still a youngster. Customers liked the idea that Bob, after finishing a job on cylinder walls, would coat them with petroleum jelly before inserting the piston just to ensure no initial friction he would say. This individual attention brought in new customers at a steady rate. The business soon began to hire and train additional help, and Ted and Bob gave an increasing amount of time to the managerial end of the business. By 1991, the annual revenue was $5 million. Accompanying the steady growth in revenue experienced by the company was an increasing need to maintain a strong rate of profitability. Two families and in a great sense, an entire community, saw Restore Incorporated as a major income producing asset. As a result of the attention to financial details. a knowledge of value-creation, and the building of economic worth, capital budgeting was handled in an efficient manner. As an example, a decision now faced the company that would require careful consideration of certain data and information which had come to the attention of the Schadlers. At a trade show which dealt with auto body work machinery, Bob 1 ' Schadler had observed a machine which would press dents from the car's sheet metal. The machine was known as a ''universal'' because it also had attachments for sanding, and for spraying heavy coatings such as primer necessary as a base for the final body paint. It appeared that the machine, if purchased, would provide significant labor savings for the company. It was necessary to investigate the actual efficiency of the machine before a decision to purchase could be made. To that end, Bob Schadler decided to talk to his cost accountant and a manufacturers representative. In a setting in which internal investments (capital budgeting) are handled efficiently, the usual sources of ideas for such expenditures are: the sales and marketing staff, the company's cost accountants, research and development personnel, and the engineering or production staff. In a company such as Restore, wherein the management structure is very economical, usually the cost accountant, the top company management, and a representative from the manufacturer formed

major expenditure decisions. The information from the meeting related directly to the economic effect the machine would have upon the firm. The machine, an Automaster 1, was priced at $60,000 and had a useful life of approximately eight years. Restore's cost accountant, Barbara Bome, outlined the economic effect of the machine upon the company in Table 1. The Automaster I would have a salvage value as follows: Probability 0.3 0.2 0.5 Estimate $5,000 7000 6500

The foregoing data were constructed by Bome and the manufacturer's representative for the machine. There would also be an increase in working capital at the time of purchase of the new machine. This would amount to $2,000 ' and was for the purpose of adding extra paint, primer, and other materials which would allow sufficient practice time on the new machine. The machine to be replaced was purchased two years earlier and was being depreciated to a zero salvage value. Bome reminded Bob Schadler that the present machine had originally cost $24,000. Its ten-year useful life was depreciated using the straight-line method. Bome also reported that the original machine could be sold for $15,000. It appeared that smaller body shops, do-it- yourselfers, and others provided a reasonably good secondary market for auto body finishing equipment. The firm's combined federal, state, and local marginal tax rate was 30 percent. In a small but well-run company such as Restore Incorporated, the reliability of internal economic information was an extremely important matter, as it would be in any for-profit business. In the case of Restore with its ''small-shop'' approach to doing business, there were no checks 'and double checks through several layers of management to ensure that a potential investment met the strategic and economic needs of the firm. This situation was perhaps less important due to the relatively few capital expenditure projects which were necessary. On the other band, before the company's money was spent, close consultation between Bome and Bob Schadler was very important. The background for such discussion was always the trade and accounting data organized by Bome and the revenue or customer projections contributed by Bob. It was by necessity an objective and rigorous analysis, with the elder Schadler often playing the roll of devil's advocate by asking hard questions. In terms of the Automaster 1 however, there was an aspect of the business for which the potential purchase had far-reaching implications for the small firm. In the city in which Restore Incorporated operated, there was an unusual shortage of reliable labor. To a large extent, the work done by the company was labor intensive. By necessity, there was a lot of hand buffing, polishing, and engine overhauls, all of which requited patient labor. Any machinery purchased was as an assist to that labor. The Automaster 1 would most likely replace two of the lesser skilled persons, whose primary duties were to perform the initial sanding of a car's

finish as a preparation for painting. Normally in a tight labor market the exchange of human labor for machine labor would be desirable. In this case there appeared to be a clear and immediate economic justification for such a move, as Table 1 indicates. However, there was an ethical question which deeply concerned the Schadlers. Within the geographical area served by the company, a steady and reliable pool of labor had been provided by a city and county business-sponsored job training programs. In effect, the program operated as follows: An alliance of city and county leaders (city council members, county commissioners, members of the clergy) had teamed up with influential corporate executives and other business leaders to mentor youth heretofore believed unemployable. The youths' problems had been brought on by minor brushes with the law, truancy, poor educational attainment and aspirations, and the like. Significant sums of money and great amounts of time had been directed toward not only locating employment for such persons, but toward providing ongoing support as they sought to establish themselves as wage earners. In other words, after an individual was selected for the program and overseen by a permanent staff of two full-time persons (al1 other staff served on a volunteer basis), regular classes and meetings were required to strengthen skills, commitment, and to monitor progress. The purpose of the classes and meetings was to bolster basic skills such as oral and written communication, to increase understanding the basics of the U.S. economic system, and to promote discussion of problems encountered at work. The program had been in place for twelve years, and the model had been replicated in several other ' cities around the country. The program provided the bulk of the labor used by Restore Incorporated. In addition, Ted Schadler had become a very forceful spokesperson for the program and had helped to recruit many of his business colleagues into it. Of course, there are ebbs and flows in any employment situation. That is, occasionally employees are let go due solely to the changing needs of the job market- this was normal and expected. It was, however, never an easy step lo take for a strong advocate of such a useful and mutually beneficial arrangement. Also, several academic studies done over the years, which focused upon the jobs program relative to the geographical area, had concluded that rather far-reaching benefits accrued to the area because of the program. Those benefits were listed as a steadily increasing standard of living as measured by rises in disposable income. The higher standard of living attracted additional businesses to the area, reduced the high school dropout rate and lowered the crime rate. The data made available to the county's business leaders by a local bank, forecast economic growth in the range or 10-15 percent annually for the foreseeable future. Thus it was against the foregoing background that the Schadlers consider whether to invest in the Automaster 1, which had immediate apparent economic benefits. Additionally, they were very concerned about the ethical question, in their minds at least, concerning their advocacy of the jobs program while preparing to reduce their labor force by approximately 20 percent. Tables 2 ant 3 illustrate the firm's balance sheet and certain revenue and income projections respectively.

Table 1 Restore Incorporated Economic Data for Automaster I Gross cost (including shipping) $60,000 Increased (incremental) annual revenue $12,000

Questions 1. Comment on the companys process of for assessing capital budgeting ideas? 2. Calculate compound growth rates for companys projected revenues and earnings? 3. Evaluate the cash flows for the purchase of Automaster I and the replacement of the original machine?

4. Is there an economic justification for the replacement? Please explain your answer. 5. Should the original machine be replaced? 6. Comment upon the ethical and other aspects of company potential reduction of its work force. 7. What additional economic information will be useful in replacement decision? 8. Assess the Schadlers concern over the ethical question. 9. Discuss the probability estimate of the new machine salvage value. Is it reasonable that the manufacturer be involved in the decision process? 10. Consider the companys size (sales and assets) and its line of business-will unforeseen obsolescence of Automaster I effect the potential replacement of the machine?