Investing in capital equipment


Kazaguruma Kitchen Equipment Ltd is a Japanese company which has a factory in South Wales. At a morning production meeting the Mouldings and Fittings team explain that they are having problems with one of the injection moulders which is producing faulty goods and keeps breaking down. The management committee then have to decide on the most cost-effective solution to the problem.


Yukio Inamura is Production Manager. He is Japanese.
Anita works on Mouldings and Fittings production. She is British.
Phil works on Mouldings and Fittings production. He is British.
Frank Parkwich is Works Manager. He is British.
Harry Evans is Finance Manager. He is British.

All these characters work at Kazaguruma Kitchen Equipment Ltd.


Vocabulary Machinery and production; investment decisions; investment finance.
Skills Telephone conversations and meetings; making a point politely against opposition; signalling disagreement; using figures in discussion.
Documents A logbook; a memo; notes.

Assessing a problem

20.1 Listen and read

In the Kazaguruma factory near Cardiff, each day starts with production team meetings. Yukio Inamura, the Production Manager, is holding the Mouldings and Fittings team meeting. Listen to what they say. What problem are they discussing? How does it affect them?

YUKIO OK, everybody. So what's new?
ANITA Well, this isn't new, because we've said it before, but it's getting to be a real problem, I mean it's that big injection moulder. see the meaning You know, the one that makes all the plastic bits for the hinges and door catches.
YUKIO Has it gone down again? see the meaning
ANITA Again? It's always going down. And even when it's not down, we're still getting defective mouldings. see the meaning I'm constantly getting complaints from Quality Control. see the meaning
PHIL That's right. And that means we're losing bonuses.
YUKIO Yes. And you have discussed ways to overcome this?
PHIL Well, yeah, we've talked about it. We've tried various things which help for a week or two, but what it comes down to see the meaning is the machine's just too old. It's past it. see the meaning
YUKIO We took over that machine with the factory; it's seven, eight years old. Very expensive to replace. Maybe even more expensive not to replace.
ANITA Well, surely we can work out what the costs would be. We could start by looking at the machine logbook. see the meaning

20.2 Listening practice

This is the logbook for the injection moulding machine. Read it carefully. Then listen as Yukio telephones Frank Parkwich, the Works Manager see the meaning, to tell him about the problem. Listen to how he joins together the different bits of information. Then listen again, and, as you listen, write what Yukio says.

FRANK I see. Yeah, we evidently have a problem here. Do you have the machine logbook in front of you? Can you give me the details of the machine - serial number and everything - and tell me all the faults that have occurred since the beginning of May, and what was done in each case?
YUKIO Yes, of course ...

reconditioned not new, but repaired in the factory so that it is nearly as good as new.
(a) hopper a container which holds raw materials, components or fastenings that the machine will use in its work. A feed hopper sends its contents to the machine as they are required.
stripped taken to pieces.
downtime time when the machine is not working.


20.3 Listen and read: estimating

Phil and Anita are trying to work out how much money they have lost because of the machine breaking down. Listen to how they explain their calculations.

PHIL How much bonus do you reckon see the meaning we're losing with that machine packing up all the time? see the meaning
ANITA Oh, I don't know. Well, let's work it out. Now, we work a five-day week, don't we, and 1 May was a Friday - how many working days was that, for the whole month?
PHIL Well, according to this calendar - you've got four weeks, starting on the fourth, the eleventh, the eighteenth and the twenty-fifth, and one odd day - the first. see the meaning
ANITA So that's four times five is twenty, and one makes twenty-one. On average we work an eight-hour day, so eight twenty-ones makes a hundred and sixty-eight hours in the month.
PHIL Right. Out of those hours, the machine was down for twenty-seven and three-quarters. What's that as a percentage?
ANITA Oh, I could never get these right. It's twenty-seven and three-quarters - that's point seven-five - times a hundred, divided by a hundred and sixty-eight - that's right, isn't it? According to the calculator, that's sixteen point five one eight.
PHIL Well, round it up see the meaning, call it seventeen per cent. So we're losing, give or take a bit either way, seventeen per cent of our bonus. How much bonus did you get last week?
ANITA Just under eighteen pounds, I think.
PHIL Right, so let's see what you should have got.

20.4 Listen and read: mental arithmetic

Phil and Anita continue their calculations. Listen to what they say. What answer did Anita get? What answer did Phil get?

PHIL Now, you lost seventeen per cent of your bonus and you still got eighteen pounds.
ANITA Well, seventeen per cent of eighteen pounds is three point oh six. Does that sound right?
PHIL Well, seventeen hundredths is about one-sixth, near enough - because six times seventeen is a hundred and two - and one-sixth of eighteen is three. So, yes, about three pounds.
ANITA It's not a lot of money, is it? Come to think of it, though, three pound a week ...
PHIL Right! Fifty-two weeks a year - that's more than a hundred and fifty pound you're losing.

20.5 Reading for key words

Find the words or phrases in 20.3 and 20.4 that show you the following calculations:

1 (4 x 5 = 20) + 1 = 21
2 8 x 21 = 168
3 27.75 x 100 + 168 = 16.518
4 17% x £18 = 3.06
5 17/100= 1/6
6 6 x 17= 102, 1/6 x 18 = 3

20.6 Figure practice

Phil and Anita actually made a very common mistake when they were doing their calculations in 20.4. What was it? What bonus did Anita actually lose last week? How much does she really lose in a year?


Discussing the options

20.7 Listen and read

The management committee meet to discuss the injection moulder. Who wants to replace the machine? Who wants to keep the old machine?

YUKIO It's quite true that this machine is not scheduled for replacement under our capital investment programme until 1994. But it is costing us more than it's worth in lost production and unscheduled maintenance.
HARRY Well, perhaps we could do our sums on that see the meaning and see how it comes out. see the meaning We have agreed on several previous occasions that the spending limits on capital expenditure mustn't be overstepped. see the meaning
YUKIO But these production shortfalls are quite unacceptable, especially when the market is just beginning to recover.
FRANK We may have to be a bit flexible on this one, Harry.
HARRY Being flexible's one thing, bending over backwards is something else. see the meaning There's plenty of leeway in the production schedules see the meaning - we've got two months' supply of hinge and door fittings stockpiled in the warehouse. And for the last five years, all the maintenance on that injection moulder has been done entirely in-house see the meaning, and we haven't had to purchase a single spare part.
YUKIO Look - in today's 'Financial Times': The economy is on the upturn. Any slack in production capacity will soon be taken up'. see the meaning
FRANK We can't afford to be wrong-footed if demand does start to recover. see the meaning

20.8 Reading for key words

The management committee choose their words carefully to express disagreement in a polite way. Find the words or phrases in 20.7 that show you the following:

1 I don't believe what you have just said is correct.
2 Don't you remember that we all said we wouldn't spend more money than we had planned?
3 We can't allow the factory to make fewer goods than we planned for.
4 Perhaps we should treat this as a special case.
5 It's not as special as you say it is.
6 We shall lose money if we aren't ready for an increase in orders.

20.9 Listen and read

Yukio explains to the Mouldings and Fittings team why it is acceptable for some of the fittings produced by the machine to be faulty. Listen to what he says. As you listen, draw the diagram that Yukio sketches.

ANITA Surely we ought to be going for a zero failure rate? We don't want even one faulty moulding from that machine. see the meaning
YUKIO It's not quite as simple as that. Absolute perfection every time isn't economic. What we want is the lowest failure rate we can get at an acceptable cost. Look.
[He sketches a rough diagram on a piece of paper.]
On a graph, the cost of rejects is a straight line - a hundred rejects cost twice as much as fifty. But the cost of preventing rejects is a curve. It is extremely high if you want none at all, then it comes down sharply if you allow a few, then it levels out. As you tolerate more and more rejects, the cost of preventing them falls more slowly. Now, if you work out the total cost, by adding the cost of rejects to the cost of prevention, you get another curve. You can see the total cost is lowest just about where the cost-of-rejects and cost-of-prevention lines cross. So what we try to do is to find the percentage of rejects that will give us the lowest total cost. This injection moulder is producing about eleven per cent of faulty mouldings, and that's definitely over the top. Quite apart from the breakdowns. see the meaning

20.10 Find the right word

Read the text below on capital investment. Write a word from the box to fill each of the gaps.

capital faulty maintenance rejects repairing replacement
spending failure limited rate repair replace spare

Every machine has a a lifespan. Most companies have b investment programmes, but falling profits may impose tight c limits that prevent the d of machines at the proper time. The production manager has to decide what failure e can be accepted. What percentage of f work, how many g , can be tolerated per month? A zero h rate is uneconomical; it would cost the company too much. If a machine is easy to i and there are plenty of j parts stockpiled in the company storeroom, it may be cheaper to go on k than to l it. In-house m can keep a machine working for years without the need for retraining operators and engineers or disrupting production schedules.


20.11 Listen and read

Harry Evans and Yukio Inamura meet to discuss how they might finance a new machine. Listen to how Harry rejects each of Yukio's suggestions. Does Harry think that the company will be able to afford a new machine?

YUKIO Two hundred thousand - can we meet that out of revenue reserves? see the meaning
HARRY You're joking. The total reserve is only two fifty see the meaning, and we're holding a proportion of that against deferred taxation. see the meaning
YUKIO Well, of course, I'm only a production engineer, so I don't pretend to understand these things. But I thought we could set off capital investment against tax, with a one hundred per cent depreciation allowance in the first year. see the meaning
HARRY Not these days we can't. They've changed the rules. The thing is that our tax position for the last financial year is still very unclear. It may have to go to arbitration see the meaning, and that could take months. We can't afford to get a big tax assessment if we've just spent all the money on a machine - even if the machine is tax-deductible in the long run.
YUKIO What about a grant? This is a Development Area! Look at all the jobs we have created!
HARRY We might be able to get a cheap loan from the Welsh Office. see the meaning
YUKIO And we can sell the old machine. It must be worth something.
HARRY From what I've heard, it's only fit for scrap. see the meaning Scrap value won't be more than five hundred - we'll probably end up paying someone to take it away. No, leave it with me, Yukio. I've got your payback figures, I may be able to swing it. see the meaning

Considering the alternatives

20.12 Document study

Yukio has read an article about a new machine. He sends his colleagues a memo about it. Read the memo carefully. In the memo Yukio uses the word 'this' three times. What does it refer to each time?

FROM  Production Manager
TO Works Manager
R&D Manager
Finance Manager
DATE 25 June 1992

Announcement of new Injection Moulder

An important article has just come to my attention in a Japanese trade journal for the plastics industry see the meaning (photocopy attached). This announces the development of an advanced new injection moulding machine. The machine is expected to be ready for shipment in about a year from now.

In the light of this, I wonder if we should consider leasing a moulder or even buying a reconditioned machine. Perhaps we can discuss this at the management committee meeting next week.


20.13 Listen and read

When he saw the article in a trade journal, Yukio immediately telephoned Frank Parkwich. Listen to what they say. What does Yukio have to do?

FRANK Hello.
YUKIO Hello. Is that Frank Parkwich?
FRANK Speaking.
YUKIO It's Yukio Inamura.
FRANK Hi, Yukio. What can I do for you?
YUKIO Somebody's just shown me an article in a Japanese trade journal for the plastics industry. It's about a new type of injection moulding machine.
FRANK Oh yeah? Sounds quite interesting. I'd like to see it.
YUKIO The article, you mean? I'm afraid it's in Japanese.
FRANK That's OK, we can get it translated. When's this machine going to be ready?
YUKIO They expect to be shipping them in about a year's time.
FRANK Oh, I don't think we can wait that long.
YUKIO It's a very advanced machine - a big improvement on what we're using now.
FRANK Mm, well. What do you suggest?
YUKIO I'd like the other members of the management committee to know about it.
FRANK Could we get it translated in time for next week's meeting?
YUKIO I think so. I thought I'd show the article first to people who are most concerned.
FRANK Yes, exactly. Why don't you tell R&D about it and Harry Evans - send them photocopies if you can.

20.14 Listen and read

The management committee meet again to discuss the new machine. Listen to what they say. What is the problem with the new Japanese machine?

FRANK Now, that injection moulder in the plastics shop. I know Yukio's been making enquiries about a new machine that's due to be launched next year. Yukio, what's the score on this one?
YUKIO I've been on the telephone to people in the company who are developing it and to some other contacts of mine in Japan. see the meaning The general feeling is that there are still some problems to be ironed out. It's an advanced piece of technology and the makers won't launch it until they are one hundred per cent sure they have got it right. That might be one year, or it might be two.
FRANK Right, well, I think, taking everything into account, the conclusion seems to be that we lease a machine, for two years in the first instance, renewable annually thereafter. Do we all agree?
HARRY I appreciate that we need to make a decision on this quickly - but there are one or two points I'd like to make ...

20.15 Reading for key words

Find the words or phrases in 20.14 that show you the following:

1 What is the present position on this matter?
2 Some useful people whom I know quite well.
3 To be solved or overcome.
4 To begin with.
5 After that.
6 I disagree, and I don't think we ought to make up our minds in a hurry.

20.16 Speaking practice: considering the options

Listen to this conversation. Then listen again, and speak the part of the man.

WOMAN There are one or two points I'd like to make. First, we don't know what this new machine will cost.
MAN I understand the cost will be comparable with that of machines currently on the market.
WOMAN That's about two hundred thousand pounds, which would have to come from our reserves, so we should lose interest payments.
MAN The machine will give a far higher rate of return than a deposit account does! What rate are we getting?
WOMAN Twelve per cent - on 200K that's twenty-four thousand a year.
MAN The machine will produce goods worth almost ten times as much as that.
WOMAN Yes, but we can buy in the same goods from another supplier at quite a low premium - only ten per cent. see the meaning
MAN That means about twenty thousand pounds a year premium - quite apart from the cost of the goods.
WOMAN Not really - because at least half our requirements will be produced by the old machine.
MAN There are other factors to consider as well - staff morale, for instance. And what about tax relief?

20.17 Writing practice

These are some notes Harry Evans made after the management committee meeting. Read through them carefully. Use the notes and the dialogues on these pages to write a short memo in favour of leasing a new machine. Explain your reasons, using figures to support your argument.


Max annual value of production: £180,000
Cost of labour and materials: £120,000 per year max
Current cost of new moulder: £200,000
Useful lifespan: 5 years
Likely cost of advanced machine next year: ???
Current cost of leasing: £40,000 per year
Corporation tax on profits: 35%
Premium on cost of components bought in: 10%
Capital reserve: £1.3m - on deposit at 12%


  1. Buy in mouldings from outside supplier
  2. Buy a new or reconditioned moulding machine
  3. Lease, indefinitely or until new machine available


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