Capital Budgeting Decisions- Chicago Valve Company
Although he was hired as a financial analyst after completing his MBA, Richard Houston's first assignment at Chicago Valve was with the firm's marketing department. Historically, the major focus of Chicago Valve's sales effort was on demonstrating the reliability and technological superiority of the firm's product line. However, many of Chicago Valve's traditional customers have embarked on cost-cutting programs in recent years. As a result, Chicago Valve's marketing director asked Houston's boss, the financial VP, to lend Houston to marketing to help them develop some analytical procedures that the sales force can sue to demonstrate the financial benefits of buying Chicago Valve's products.
Chicago Valve manufactures valve systems that are used in a wide variety of applications including sewage treatment systems, petroleum refining, and pipeline transmission. The complete systems include sophisticated pumps, sensors, valves, and control units that continuously monitor the flow rate and the pressure along a line and automatically adjust the pump to meet pre-set pressure specifications. Most of Chicago Valve's systems are made up of standard components, and most complete systems are priced from $100,000 to $250,000. Because of the somewhat technical nature of the products, the majority of Chicago Valve's salespeople have a background in engineering.
As he began to think about his assignment, Houston quickly came to the conclusion that the best way to "sell" a system to a cost-conscious customer would be to conducting a capital budgeting analysis which would demonstrate the cost effectiveness of the system. Further, Houston concluded that the best way to begin was with an analysis for one of Chicago Valve's actual customers.
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