Fenmoor: Two Requests Before the Capital Committee

Fenmoor Seeds breeds, cleans and packs vegetable seed at its plant in Colmere and sells it to garden centers and commercial growers. Each autumn its capital committee, chaired by the finance director, reviews spending requests from the plant. Two requests are before the committee this year. They are independent: the committee may approve either, both or neither, and capital is not rationed.

Request 1: an in-house pelleting line. Fenmoor pays a contract processor to coat its smallest seeds (lettuce, carrot and onion) in clay pellets, so that growers' drills can sow them one at a time. The plant controller, Rowan Ashdown, has prepared a request to bring this work in-house. The request sets out these facts:

• A new pelleting drum line would cost $346,500 to buy and install, payable only if the request is approved. Running it would use $33,600 a year of coating materials and electricity.
• The line would grade finished pellets with an optical sorter that Fenmoor already owns. The sorter was bought three years ago for $187,400 for a cut-flower seed range that was later dropped, and it has stood idle since. A seed-cleaning cooperative has offered to buy it for $48,600. If the line goes ahead, Fenmoor will keep the sorter and decline the offer.
• Last season Fenmoor spent $43,800 on grower trials of pelleted seed. The trials are finished, and none of that spending can be recovered.
• The line would stand on floor space in the packing hall that is currently empty and has no other planned use. Fenmoor's cost system would then charge the line $17,900 a year of the hall's existing property insurance and security costs, apportioned by floor area. Those costs are the same in total whether or not the line is installed.

Ashdown obtained proposals from three equipment makers and recommended buying the line from Pellatec Engineering. Last week the finance director learned from Pellatec's sales manager that Ashdown has been discussing a finance-manager post at Pellatec for several weeks. Ashdown, an IMA member, had not mentioned these discussions to anyone at Fenmoor. No job offer has been made.

Request 2: heat recovery for the drying kilns. A heat-recovery unit would capture warm exhaust air from the kilns that dry harvested seed, cutting the plant's gas use. The equipment costs $236,450, and installation and ducting cost a further $73,700. Finance estimates that the unit would generate after-tax net cash inflows of $65,000 a year for nine years.

Hailstorm. In March a hailstorm broke through part of the packing-hall roof. Rainwater soaked packed stock, and the packing lines were shut for five weeks at the start of the spring dispatch season. Fenmoor's property insurer has accepted the claim for the roof repairs and the damaged stock. The storm did not reach the drying kilns and does not change any figure in either request.

Fenmoor's hurdle rate for capital projects is 8%.