Burlington Northern
Background Burlington Northern (BN) has undertaken the project to test the feasibility of using Advanced Railroad Electronics System (ARES) on its Iron Range route. To date the company has spent $15 million with its technology partner Rockwell International spending approximately $45 million. The results of this test suggest that the system could be utilized effectively with modest changes in some areas. Given this, BN hired several consultants to help the railroad perform analysis on specific areas to determine if full implementation made economic sense. The result suggested a positive NPV of approximately $600 million. However, new executives have come on board since the ARES project was initiated and current managers feel they need to resell the project to the top brass. Issues With significant turnover in the executive ranks it may difficult to sell this project as current managers weren’t part of the earlier decision making process. However, capital budgeting shouldn’t be a sell. Formal plans should be in place to allow for a stable and predictable decision making process. Some issues that need to be analyzed as part of the decision making process include accuracy of projections over time, estimated cash flows, levels of risk for alternatives, general economic conditions, the timing of cash-flows, and, finally, the level of uncertainty for given information Strategic Considerations The first step in the capital budgeting process is defining the strategy the organization intends to pursue over a given period of time.