The Connecticut Valley School Introduction

In this situation you must allocate a limited capital budget among seven competing projects. Three parties are involved in the negotiation: the headmaster, the faculty bud- get committee, and the board of trustees. While the issues in this exercise appear straightforward, the parties do not necessarily perceive the budget process in the same manner.

Read the background information for the Connecticut Valley School; then read the role information that the instructor has provided for you. Participants who have been assigned to the same team (faculty budget committee, board of trustees, headmaster) will meet separately to decide how to manage the upcoming meeting.

The different parties will meet together to negotiate an agreement about the cap- ital projects that will be funded. The chairperson of the board of trustees will chair this meeting. Participants will leave this meeting with an agreement about the prior- ity of the capital spending projects. If no agreement is reached, each team should have a record of their final rankings and where they are willing to make further concessions.

Background Information

The Connecticut Valley School (CVS) is a private boarding school in Massachusetts. Headmaster John Loring has just submitted his annual recommendations for capital spending to the board of trustees. Capital spending will be funded from two sources: new debt and the accumulated interest on the schools endowment. Since the school is approaching its debt capacity and trustees are committed not to draw on the principal of the endowment, the school can afford to spend only $900,000 to $1,000,000 on cap- ital improvements over the next year. The seven major projects under consideration are described briefly here:

1. Swimming pool Cost: $640,000 Expected life: 15 years

Currently the school rents a local facility for $60,000 per year. In addition, the school pays $10,000 per year to bus students to the facility. If the school owned a pool, it could rent out pool time to local organizations for $30,000 per year. The headmaster feels that more students would use the pool if it were located on campus.

2. Buses Cost: $270,000 (3 buses) Expected life: 6 years Salvage value: Nil

Source: Written by Peter Nye, University of Washington at Bothell. Used with permission.

CVS owns two campuses several miles apart. A private bus company transports students between campuses at a cost of $180,000 per year. If the school owns and operates its buses, it will incur $80,000 in operating expenses each year.

New roof for hockey rink Cost: $60,000

A new roof is essential to prevent further damage to the rink and to the arenas infrastructure. The project could be delayed one year; but due to the additional damage that would result, total repair costs would jump to $120,000.

Wood chip heating system Cost: $800,000 Expected life: 15 years

Cold New England winters and the high cost of fuel oil have been draining the schools operating funds. This new heating system could save the school between $140,000 and $160,000 per year over the next 15 years.

Renovation of fine arts building Cost: $300,000

The faculty and trustees agree that an improved fine arts program is critical to the schools liberal arts mission. The renovated fine arts building would include a photography lab, a pottery shop, and art studios, as well as a small gallery. The building would not generate any incremental revenues or cost savings. However, a wealthy benefactor (after whom the building would be named) has offered to contribute $150,000 to subsidize the project. In addition, the facility would provide some marketing benefits, as a strong arts program attracts quality students.

Renovations to womens locker room Cost: $40,000

The womens locker room has not been renovated since it was built 33 years ago for visiting mens teams. Many of the women have complained that the facility is dirty, depressing, and overcrowded. Some women refuse to use the facility. The headmaster insists that these complaints are unfounded. The renovations would generate no incremental revenues or cost savings.

Upgrading the computer lab Cost: $120,000

Over the past eight years computer equipment has been purchased on a piece- meal basis with surplus operating funds. To support curricular goals, the school needs state-of-the-art computers and more workstations. The director of comput- ing has proposed that the equipment be upgraded over three years. The first stage of this plan would require spending $120,000 on personal computers in the com- ing year. An additional $160,000 would be spent over the following two years.

The school uses a 12 percent annual discount rate to evaluate all cost-saving

investment projects.

The Connecticut Valley School 539

540 Exercise 24

Since not all of these projects can be undertaken, they must be prioritized. In his report to the trustees, Headmaster Loring ranked the seven projects as follows:

Swimming pool

Hockey rink roof

Buses

Heating system

Fine arts building

Womens locker room

Computer lab

$640,000 $60,000 $270,000 $800,000 $300,000 $40,000 $120,000

He recommended that this years capital funds be spent on the construction of a swimming pool, repairs to the roof of the hockey rink, and the purchase of three buses. These projects would require a total expenditure of $970,000. Lorings rankings were based on his subjective evaluation of costbenefit trade-offs.

While the trustees must make the final decision, they have solicited advice from the faculty. The faculty is in touch with the day-to-day operations of the school and with the needs of the students. In addition, many faculty members feel that they were closed out of the decision process last year and that the ultimate allocation of funds was inconsis- tent with the schools objectives. In an attempt to improve the decision process, the trustees appointed a faculty budget committee to advise them on capital spending prior- ities. A meeting of the trustees, the budget committee, and the headmaster has been scheduled. The purpose of this meeting is to prioritize capital spending projects. It is expected to be a lively and productive session.

Solve the case attached and present your solution to the case with possible projects that can be undertaken within the stated budget. Justify your answer as to why you have selected a particular project in your proposal, for each project you select and propose in your total budget. Mention the total budget of your proposal and the cost of each project you select.

Bear in mind the interest of all concerned parties in this case before you propose the final solution/proposal/budget.