(3 pages of text)
Case (Gen Exp)
Valjibhai Stones, a supplier of quality stone chips in India, has been approached by a multinational company that needs a reliable supplier of quality stone chips for the next eight years. Accepting the order would require a capacity expansion to produce high-quality aggregate solely for the multinational company and at the cost of foregoing all of its existing business. If the offer is accepted, the company would earn substantial revenue for eight years, but would then need to seek fresh business in a highly competitive market.
The case addresses the financial evaluation of a capital expenditure proposal. It highlights the appropriateness or otherwise of using return on investment and economic value added as performance measurement tools. Also addressed is the use of other tools such as net present value, internal rate of return and the payback period. Students are introduced to the theory related to estimation of weighted average cost of capital. Valjibhai Stone’s decision is illustrated as a culmination of financial evaluation, strategic fit, and macro and micro environmental conditions.
The case can be used at two stages in a master’s level program: at an early stage as a part of a compulsory corporate finance course or in a strategic corporate finance or a strategic cost management course. The case can be taught from an accountancy and finance angle and/or from a strategy angle. It provides an opportunity to explain the concepts of cost of capital and analysis of capital expenditure decisions in a strategic cost management course at the master’s level.
Mining, Quarrying, and Oil and Gas Extraction
India, Small, 2010
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