On January 1, 2005, the controller of O’Brian Manufacturing Company is planning capital expenditures for the years 2005–2008. The following interviews helped the controller collect the necessary information for the capital expenditures budget.
Director of Facilities: A construction contract was signed in late 2004 for the construction of a new factory building at a contract cost of $10,000,000. The construction is scheduled to begin in 2005 and be completed in 2006.
Vice-President of Manufacturing: Once the new factory building is finished, we plan to purchase $1.7 million in equipment in late 2006. I expect that an additional $400,000 will be needed early in the following year (2007) to test and install the equipment before we can begin production. If sales continue to grow, I expect we’ll need to invest another million in equipment in 2008.
Vice-President of Marketing: We have really been growing lately. I wouldn’t be surprised if we need to expand the size of our new factory building in 2008 by at least 45%. Fortunately, we expect inflation to have minimal impact on construction costs over the next four years.
Director of Information Systems: We need to upgrade our information systems to wireless network technology. It doesn’t make sense to do this until after the new factory building is completed and producing product. During 2007, once the factory is up and running, we should equip the whole facility with wireless technology. I think it would cost us $1,800,000 today to install the technology.
However, prices have been dropping by 20% per year, so it should be less expensive at a later date.
President: I am excited about our long-term prospects. My only short-term concern is financing the $6,000,000 of construction costs on the portion of the new factory building scheduled to be completed in 2005.
Use the interview information above to prepare a capital expenditures budget for O’Brian Manufacturing Company for the years 2005–2008.