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Chick-fi l-A:
Growth in sales and earnings in the restaurant industry comes mainly via
innovative new products, new outlet openings, and acquisitions. Its award-winning ad cam-
paigns, featuring cows encouraging us to “Eat Mor Chikin,” have increased sales.
Capital budgeting decisions require a great deal of analysis. Information generation
develops three types of data: internal fi nancial data, external economic and political data, and
nonfi nancial data. These data are combined to estimate a project’s cash fl ows.
Table 17.1
lists data items that may need to be gathered in the information generation
stage, depending on the project’s size and scope. Many economic infl uences can directly
impact a project’s success by aff ecting sales revenues, costs, exchange rates, and overall
project cash fl ows. Regulatory trends and political environment factors, in the domestic and
foreign economies, may help or hinder the success of proposed projects.
Financial data relevant to the project are developed from sources such as marketing
research, production analysis, and economic analysis. Using the fi rm’s research and internal
data, analysts estimate the cost of the investment, working capital needs, projected cash fl ows,
and fi nancing costs. If public information is available on competitors’ lines of business, this
should be incorporated into the analysis to estimate potential cash fl ows and to determine the
eff ects of the project on the competition.
Nonfi nancial information relevant to the cash fl ow estimation process includes data on
the means used to distribute products to consumers, quality and quantity of the labor force,
dynamics of technological change in the targeted market, and information from a strategic
analysis of competitors. Analysts should assess the strengths and weaknesses of competitors
and how they will react if the fi rm undertakes its own project.
To illustrate, in mid-1998, a strike against General Motors (GM) caused its management
to re-examine its capital budgeting plan. GM had been planning to invest $21 billion in its
U.S. plants between 1998 and 2002. The prospect of poor labor relations and ineffi
cient union
work rules was giving GM leaders second thoughts about its planned U.S. capital investment.
3
Political risks, on the other hand, can aff ect overseas projects. Delays have occurred in devel-
oping oil fi elds in Kazakhstan and Turkmenistan because the projects involved building an oil
pipeline across politically unstable or unfriendly countries in order to get the oil to waterways
and oil tankers.
4
In another example, the surprise introduction of a seven-seat model in the
European compact minivan market by competitors caused Ford to abandon its plans to intro-
duce a fi ve-seat model, after several years and many millions had already been spent on design
eff orts.
5
Also, the push for “green” products is driving many fi rms, from auto manufacturers
to manufacturers of household products, to develop more environmentally friendly products,
or to at least proclaim the green benefi ts on their product packaging.
6
3
Micheline Maynard, “GM May Rethink Plant Investments,”
USA Today
, (June 18, 1998), p. 1B.
4
Hugh Pope, “Scramble for Oil in Central Asia Hits Roadblocks,”
The Wall Street Journal
, (March 13, 1998), p. A12.
5
Scott Miller, “Ford Scraps Plans for Compact Minivan, Years in Planning, in Cost-Cutting Eff ort,”
The Wall Street
Journal
, (February 14, 2000), p. A18.
6
Author unknown, “Toyota Prius Dominates Green Vehicle List,”
Environmental Leader
, (January 17, 2013),
accessed January 29, 2013, http://www.environmentalleader.com/2013/01/17/toyota-prius-dominates-green-
vehicle-list/; Author unknown, “Walmart Prescribes Green Packaging, Concentrated Clorox,”
Environmental
Leader
, (January 29, 2013), accessed January 29, 2013, http://www.environmentalleader.com/2013/01/29/walmart-
prescribes-green-packaging-concentrated-clorox/.
526
C H A PT E R 1 7 Capital Budgeting Analysis
Table 17.1 lists some of the information that fi rms may use to evaluate capital spending
projects. For a specifi c industry example, oil and gas companies ranked seven items, from
most important to least important, for their eff ect on capital spending decisions:
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