East Georgia Construction Company

5 Pages Posted: 21 Oct 2008

See all articles by Robert L. Carraway

Robert L. Carraway

University of Virginia - Darden School of Business

Robert Jenkins

University of Virginia - Darden School of Business

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Abstract

A construction company that serves a 20-county area of eastern Georgia (United States) has as its main source of revenue the manufacture and placement of asphaltic concrete used in road construction. Thanks to a new, multiyear, state-funded highway program, the company needs to expand its asphalt production capacity and is considering two options: purchasing a new portable drum-mix plant or purchasing a used (nonportable) batch plant. The company uses net present value (NPV), payback, profitability index (the ratio of the present value of future cash flows divided by the initial investment), and internal rate of return (IRR) to evaluate capital expenditures of this type. Pro forma cash flow statements (Excel spreadsheet models) are provided for each option. The decision is complicated by conflicting messages from the various evaluation criteria and uncertainty in some of the inputs.

Excerpt

UVA-QA-0664

Rev. Sept. 10, 2015

East Georgia Construction Company

In late August of 1989, David Brown, president of East Georgia Construction Company (EGCC), was preparing his annual capital-budgeting recommendation. Paramount in his mind was the upcoming state legislature vote on the proposed $ 9.25 billion Georgia highway program and the opportunities for growth that program represented for his firm. The most immediate need would be for another asphalt-manufacturing plant.

The New Highway Program

The state legislature was going to vote on the new highway bill within the month. If the bill passed as expected, it would greatly increase demand for EGCC's services. The bill's provisions currently set aside $ 9.25 billion for rural highway construction, to be spent equally over the next 13.5 years. Still, Brown could not be certain that the bill would pass in its current incarnation.

. . .

Keywords: decision analysis, risk analysis, discounted cash flows, time value of money, net present value, internal rate of return, simulation, financial analysis, project analysis

Suggested Citation

Carraway, Robert L. and Jenkins, Robert, East Georgia Construction Company. Darden Case No. UVA-QA-0664, Available at SSRN: https://ssrn.com/abstract=912124

Robert L. Carraway (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/carraway.htm

Robert Jenkins

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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