DISCUSSION CASES 28 34. Circle City is building a new bridge over a small river. The city council has decided to fund the bridge by selling bonds and to pay the bondholders from The bonds would be sold for $1,000 each. The city future taxes. The cost of the bridge is as follows: council wants to sell enough bonds to pay for the right-of-way, design, construction, and future main- Right-of-way purchase $50,000 tenance. The total value of the bond issue must be Design $40,000 determined. The rate on the bonds is 4.5%. Construction $2,200,000 Maintenance First year costs of $10,000 increase by $4,000 each year for 50 years DISCUSSION CASES Speck Corp. As a producer of quality wood products, Speck has become successful in its field. Profits and sales are expanding. Customer satisfaction is high. James Speck is considering the methods they use to evaluate investments in new products and equipment. Currently, the management es- timates the profits available for the coming year. From this value, they look at the equipment that is wearing out and needs to be replaced. This equipment replacement is the first priority for funds. Then they look at the new products that the design and marketing team is suggesting for the coming year; the costs, investments, and revenues are estimated; and management makes a decision about funding the new products. This is usually a lively discussion with many differ- ing opinions since the new products are risky and usually only 50% of the new products that are introduced in a given year are successful. After the old equipment decisions and the new products decisions are made, if there are any funds remaining, the management group considers the possible dividends to be paid to the owners. The dividends have been very good in recent years. Jim Speck is not sure if the techniques the organization is using for the investment of funds could be improved. He thinks that as long as business is good and profits are high, the decision process is easy, but he thinks that if the firm should run into a period of low profits, the decision process would break down. The management group is experienced and works well together. Jim doesn't want to intro- duce anything into the decision process that would decrease the group's enthusiasm or effi- ciency such as too much accounting analysis of the decisions. He does, however, feel that most of the decision making is based on intuition. This seems to have worked well, but he wonders if there is anything else they could do to improve the decisions. 1. Is this situation typical in firms or is it unusual? (2. What could Jim do to supplement the decision-making abilities of the group? 3. Should the existing decision-making process be completely changed to a more quantitative technique? 4 . What are the differences in making equipment decisions when profits and sales are high compared to when they are low? 5. What other things should Jim consider
