Road King TrucksIntroductionMichael Livingston has recently been hired as the CEO of Road King Trucks, Inc.Previously he had been the marketing manager for a large manufacturing company andhad established a reputation for identifying new consumer trends. Road King Trucks Inc.is a California-based truck manufacturing company. The company is well known formanufacturing large, heavy-duty trucks at a reasonable cost. One of its greatestachievements is that its trucks can be easily modified or customized for differentapplications. Road King Trucks also builds school buses.The company is considering an expansion of its current product line to include transitbuses. Mr. Livingston feels that due to high gasoline prices, commuters will be morewilling to consider using mass transit instead of using their cars to commute to work.Company ProfileRoad King Trucks, Inc. was established by the Smith brothers in 1880 as the CaliforniaWagon Company. The firm started manufacturing horse-drawn wagons to serve thegrowing population in California. The brothers quickly realized that the times werechanging, so they started looking for the technologies that would keep them at theforefront of their field of business. In 1915, the Smith brothers decided that they neededto make trucks as replacements for the wagons, because trucks were starting to serve thesame uses as wagons, and the wagon industry was not going to be viable in the longerterm.The company started making school buses in the early 1940?s. Most manufacturers hadbeen commissioned by the government to produce different large vehicles to supportWorld War II operations. Road King Trucks opted to produce buses. It was an easydecision to make, since the buses would use common parts with the company?s trucks,and the customers were local governments. Starting in the 1950?s, the school busbusiness accounted for about 50% of Road King Trucks? revenues.The Transit Bus OpportunityMr. Livingston arranged a meeting with the firm?s top management, as well as the chiefdesign and manufacturing engineers to propose his new product. He presented anargument that more individuals in the United States and Canada would be willing to usepublic transportation than before, because people were becoming more environmentallyconscious. Also, recent increases in fuel costs seemed to be long lasting. This was anopportunity to get people hooked on transit buses, as he put it.The proposal under consideration was for the introduction of a large, public transport bus.To distinguish Road King Trucks from other manufacturers, the proposal included detailsabout the level of comfort, air-conditioning, efficiency, and quietness of operation thatneeded to be developed. Road King Case Paper Winter 2016Mr. Phillips and Mr. Lopez, the two engineers, reacted enthusiastically and quicklypointed out that the bus could be based on the company?s trucks. The frame currentlyused for building the trucks could be modified to accommodate buses at a relatively lowcost. The marketing vice president, Mr. Chen, pointed out that a marketing analysiscould be done quickly, and at a reasonable cost. At this point, Mr. Livingston chargedthe participants in the meeting to produce a financial plan for the development andproduction of a transit bus.Public TransportationThe use of public transportation had declined steadily since the 1950?s. Most peoplewere opting to use their personal vehicles for all of their transportation needs. Recently,however, most of the metropolitan areas in the United State and Canada, the targetmarkets for the new bus, had become more and more congested; and parking, which wasalready very expensive, was becoming scarce.This combination of trends has renewed the public?s interest in good and reliable publictransportation. Several municipalities have been campaigning to their residents andcommuters that they should use public transportation for business commuting, and onlyuse their cars for shopping and weekend activities. However, such campaigns need to besupported by making high quality public transportation available to the target riders.The DecisionThree weeks after the initial meeting, the vice presidents presented the sales and costforecasts shown in the attached exhibits. The information presented contains the cost ofproduction, financing information, and warranty cost estimates. The proposals alsocontained two engine options for the engines: The Detroit engine, and the Marcus engine.The Detroit engine was more expensive to install, but had a lower warranty cost. TheMarcus engine was less expensive to install, but had a higher warranty cost. This beggedthe question: Which engine should be used?Issues and AnalysesMr. Livingston noticed that there was a great deal of enthusiasm among the managementgroup about the transit bus opportunity, but his cautious nature told him to also seek amore objective viewpoint. Consequently, he sought out you to analyze the proposedproject and provide your recommendations directly to him.

The issues he wants you to address in your analysis and report are the following:

1) How much importance should be given to the energy cost situation?

2) What are the project?s cash flows for the next twenty years? What assumptionsdid you use?

3) What is the company?s cost of capital? What is the appropriate discount factor(which may be different) for you to use in evaluating the bus project?

4) If you decide to go ahead with the project, which of the two engines should beused in the bus, and why?

5) Evaluate the quality of the project, by using appropriate capital budgetingtechniques. Road King Case Paper Winter 20166) Would you recommend that Road King Trucks accept or reject the project? Whatare the key factors on which you base your recommendation?

MEMORANDUM To: BUS 330 Students Subject: Road King Trucks: Stuff to Figure Out Below is a list of items you need to identify and quantify to complete the Road King Trucks case A. For Each Year 1. Revenue 2. Variable costs a. Labor cost per bus b. Parts cost per bus c. Engine costs per bus (2 options) 3. SG&A costs 4. Training costs 5. Warranty costs a. Bus b. Engine (2 options) 6. Depreciation 7. Working Capital needs B. Project Related 1. Investment costs C. Cost of Capital 1. Company's weighted average cost of capital (WACC) 2. Appropriate cost of capital for this project And, after doing this, you have to form a basis for a goo go decision on the project, with appropriate support for your decision (think NPV and IRR). Your final report, limited to 5 pages plus exhibits, should include a spreadsheet containing all relevant calculations, and answers to the 6 questions listed on page 2 of the case statement. Keep in mind that an answer or recommendation is only as good as the supporting analysis performed to reach it. What you \"think\" is irrelevant, unless it can be supported with facts. Have fun with this. If done well, it will be a valuable experience. GJS File: Road King Trucks Stuff.doc MEMORANDUM To: BUS 330 Students Subject: Road King Trucks: Project Deliverables Here is what I expect for your individual projects: 1. A report broken down into the following sections: - Summary results and recommendationsup front, concise, and to the point. Answers to the 6 questions askeddevote a paragraph to each, with individual headings Attached exhibits which are readable and understandable (I suggest using Calibri font in 11 pitch for the spreadsheet(s), because it is plain and easy to read) Spreadsheet printout(s) showing your derivation of o Operating Cash Flows o Incremental Cash Flows, including investment and salvage o Warranty costs o WACC o NPV, IRR, Payback, and Profitability Index Any other supporting exhibits you feel are relevant - A file containing your spreadsheet file, including all supporting elements. I want to get a sense of how well you used the power of the Excel program to make your calculations. 2. A simple typed report is adequate. I do not need fancy graphics or covers. - Use 12 pitch, Times Roman font for the body of the report. - Single spacing is preferred, and will allow you more than enough space to complete your report in less than 5 pages. - You should refer back to your exhibits for data or calculations, keeping them out of the main body of the report. - Make sure name is listed on a cover sheet, as well as the project title and the date. The cover page does not count against the 5 page limit. - I am a stickler for grammar, punctuation, and spelling (GPS). Proof read your document well. Remember, you are selling your recommendations on this project to the CEO, so presentation is very important. GPS is worth 10% of the report grade. Lastly, please get your report to me on time, post your files to Blackboard by March 6, 2016. No late reports will be accepted, so plan accordingly. If you have any questions, feel free to email me. GJS File: Road King Trucks Project Deliverables.doc