Road King Trucks Introduction Michael Livingston


CT JK 1027065217 same as done by you but need a diff. sol.

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 and had established a reputation for identifying new consumer trends. Road King Trucks 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.Company ProfileRoad King Trucks, Inc. was established by the Smith brothers in 1880 as the California wagon Company.

The firm started manufacturing horse-drawn wagons to serve the growing population in California. The brothers quickly realized that the times were changing, 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 needed to make trucks as replacements for the wagons, because trucks were starting to serve the same uses as wagons, and the wagon industry was not going to be viable in the longer term.The company started making school buses in the early 1940’s. Most manufacturers have been commissioned by the government to produce different large vehicles to support World War II operations. Road King Trucks opted to produce buses. It was an easy decision 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 bus business 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 chief design and manufacturing engineers to propose his new product. He presented an argument that more individuals in the United States and Canada would be willing to use public transportation than before because people were becoming more environmentally conscious. Also, recent increases in fuel costs seemed to be long-lasting. This was an opportunity 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 details about the level of comfort, air-conditioning, efficiency, and quietness of operation that needed to be developed.

Road King Case Paper Winter 2016Mr. Phillips and Mr. Lopez, the two engineers, reacted enthusiastically and quickly pointed out that the bus could be based on the company’s trucks. The frame currently used for building the trucks could be modified to accommodate buses at a relatively low cost. The marketing vice president, Mr. Chen, pointed out that a marketing analysis could be done quickly, and at a reasonable cost. At this point, Mr. Livingston charged participants in the meeting to produce a financial plan for the development and production of a transit bus. Public TransportationThe use of public transportation had declined steadily since the 1950’s. Most people were 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 target markets for the new bus, had become more and more congested; and parking, which was already very expensive, was becoming scarce.

This combination of trends has renewed the public’s interest in good and reliable public transportation. Several municipalities have been campaigning to their residents and computers that they should use public transportation for business commuting, and only use their cars for shopping and weekend activities. However, such campaigns need to be supported 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 of production, financing information, and warranty cost estimates. The proposals also contained 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. Marcus engine was less expensive to install but had a higher warranty cost. This begged question: Which engine should be used?Issues and AnalysesMr. 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:

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

What are the project’s cash flows for the next twenty years? What assumption did you use?

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?

If you decide to go ahead with the project, which of the two engines should be used on the bus, and why?

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