Michael 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 and had established a reputation for identifying new consumer trends. Road King Trucks Inc. is a California-based truck manufacturing company. The company is well known for manufacturing large, heavy-duty trucks at a reasonable cost. One of its greatest achievements is that its trucks can be easily modified or customized for different applications. Road King Trucks also builds school buses.

The company is considering an expansion of its current product line to include transit buses. Mr. Livingston feels that due to high gasoline prices, commuters will be more willing to consider using mass transit instead of using their cars to commute to work.

Issues and Analyses

Mr. Livingston noticed that there was a great deal of enthusiasm among the management group about the transit bus opportunity, but his cautious nature told him to also seek a more objective viewpoint. Consequently, he sought out you to analyze the proposed project 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 assumptions did 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 be used in the bus, and why?

5) Evaluate the quality of the project, by using appropriate capital budgeting techniques.

6) Would you recommend that Road King Trucks accept or reject the project? What are the key factors on which you base your recommendation?