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In 1970, the Adolph Coors Company was a small brewer serving a regional market. But due to its quality products and aggressive marketing, by 1990 Coors had risen to the number three brand in the U.S. beer market. During this high-growth phase, the corporate emphasis was on marketing, technology, engineering, and capacity additions. When investing in new equipment or factories, Coors always went "the Cadillac route," with little scrutiny of proposed projects. In effect, their motto was "If you build it, they will come." Indeed, for two decades consumers did switch to Coors.

However, the brewing industry began to experience major problems in the 1990s. Many consumers were drawn to wine, causing growth in beer sales to fall below 1 percent per year. In addition, large numbers of microbreweries opened, providing beer drinkers with an alternative to the national brands. These events proved particularly painful to Coors, whose lack of financial discipline had led to a frivolous use of capital and thus to a high-cost infrastructure.

In February 1995, Coors hired a new CFO, Timothy Wolf, who soon learned that Coors had a low return on invested capital, negative free cash flow, and an unreliable planning/forecasting process. Wolf quickly created an in-house education program to teach managers and engineers how to conduct a rational project analysis. Even more important, he began to shift the corporate culture from a focus on undisciplined growth and high-technology engineering to creating shareholder value. This new focus was put to the test in 1996, when Coors reexamined its plans for a major new bottle-washing facility in Virginia. Using the capital budgeting processes established by Wolf, the project team was able to reduce the cost of the investment by 25 percent. They also implemented design changes that led to lower operating costs.

Under Wolf's guidance, Coors has steadily improved both its return on invested capital and its free cash flow. Financial analysts are impressed with Wolf's efforts. Skip Carpenter of Donaldson, Lufkin & Jenrette says, "From a financial perspective, there's absolutely no question Coors is better positioned to deal with the difficulties of the beer industry." Investors seem to agree, as Coors' stock price has climbed from about $14 per share when Wolf joined to over $52 per share in mid-2001, an annualized average gain of more than 24 percent.

'See an article by Stephen Barr, "Coors's New Brew," CFO, March 1998, 91-93.

The textbook's web site contains an Excel file that will guide you through the chapter's calculations. The file for this chapter is Ch 07 Tool Kit.xls, and we encourage you to open the file and follow along as you read the chapter.

This chapter's focus is on capital budgeting, the process of evaluating specific investment decisions. Here the term capital refers to operating assets used in production, while a budget is a plan that details projected cash flows during some future period. Thus, the capital budget is an outline of planned investments in operating assets, and capital budgeting is the whole process of analyzing projects and deciding which ones to include in the capital budget.

Our treatment of capital budgeting is divided into three chapters. This chapter provides an overview of the capital budgeting process and explains the basic techniques used to evaluate cash flows. Chapter 8 then explains how to estimate a project's cash flows and risk. Finally, some projects provide managers with opportunities to react to changing market conditions. These opportunities, called "real options," are described in Chapter 17.

As you read this chapter, think about Coors and how it uses capital budgeting to create value for shareholders.

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