Product details

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.