Question

Introduction

Three Structural engineers, Huey, Luey, and Stan created HLS. The firm has been involved with industrial and commercial work related to the construction facilities. They have designed heating and ventilation systems for factories and shopping malls, piping for refineries and chemical plants, and even a treatment facility for oil tanker ballast water.

When HLS first started, most of the work was subcontracts for heating and ventilation systems for individual buildings. The scope of work has increased over the years as well as the staff. The firm now employs 30 engineers including the original 3 founders. HLS still generally works as a subcontractor to other design firms. Presently, the three owners are content and do not want to diversify into the other branches of engineering or become more generalized.

Almost all of the analysis and technical drawings are done with an ever-increasing array of software packages. This presents an issue for HLS moving forward. The current system seems to be have issues keeping pace with the demands of work. As a result, HLS has lost $90,000 worth in jobs because of not working with updated software.

The specific package that is being sought is offered by Scrooge industries. The initial cost would be $50,000 and would have an annual fee of 15%. This fee covers service, answering questions, and periodic updates. Another $60,000 would be needed for a software integration. The training for the program is estimated to be $24,000, and one sixth of that would be an annual upkeep cost. This program is expected to have a life expectancy of 10 years.

If the software does prove practical, the next step would be to find out how to finance it. HSL have come up with 2 main sources to draw income. The first is to offer stock to employees. The second would to take out a loan from the bank.

Option A would be to offer stock options to the employees. Since HSL cannot set up the plan as a profit share (there is no money to share) employees would take part of their pay as stock. Then HSL would match on a one-for-four basis. Example: someone who set aside $2000 would be credited with $2500 in stock at the end of the year. It can be assumed that half of the employees (15) would participate with an average of $100 per month per employee.

Option B would be getting a loan from the bank. The maximum amount the bank would loan HSL would be $140,000 at 15% over three years or less. If more is needed, it will cost HSL $9,000 in fees for securing the loan and an additional 1% interest on top of it.

Recommendations

The recommendation is to get the software.

Analysis:

1. Determine which method would be best to pay for the software

Answer 1

HLS fund requirement for procuring the required software as

Time	0	1	2	3	4	5	6	7	8	9	10
Intial cost	($50,000)
Cost of Integration	($60,000)
Cost of training	($24,000)
Annual fee		($7,500)	($7,500)	($7,500)	($7,500)	($7,500)	($7,500)	($7,500)	($7,500)	($7,500)	($7,500)
Annual upkeep cost		($6,000)	($6,000)	($6,000)	($6,000)	($6,000)	($6,000)	($6,000)	($6,000)	($6,000)	($6,000)
Total cost	($134,000)	($13,500)	($13,500)	($13,500)	($13,500)	($13,500)	($13,500)	($13,500)	($13,500)	($13,500)	($13,500)

The the above table , the initial requirement of fund is $134,000 , which cannot be created by the option A (employee stock option ) as only 15 employees are participating with contribution of $100 per month.

HSL has no other option , the company should raise the required fund as loan from bank only by dint of high cost , as the updated software is the immediate requirement for them to be in the business.