For this assignment, you will read the SSRN case study titled Caterpillar, Inc.: The Impact of Decision Biases and Risk on Capital Budgeting, which analyzes the Caterpillar organization and the impact...

Table of Contents
1    Option 1: Expanding and refocusing an existing production facility in Aurora, IL    2
1.1    Benefits of Expansion    2
1.2    Operating Costs    2
1.3    Capital Spend Analysis    2
1.4    Risks to the Overall Company    2
2    Option 2: Building a new facility in China    2
2.1    Benefits of Expansion    2
2.2    Operating Costs    2
2.3    Capital Spend Analysis    2
2.4    Risks to the Overall Company    2
Option 1: Expanding and refocusing an existing production facility in Aurora, IL
Benefits of Expansion
The main benefit with respect to this expansion option is that the Aurora facility was familiar in terms of production for both excavator and loader production and hence the senior executives in Peoria could easily assign the production related tasks to the existing team without any new training. The technology / capital assets pertaining to the production were existing Ans so was the raw material supply chain as well as trained labour force with par skill set.
Operating Costs
The operating costs pertaining to the production facility in the US is to be o the higher side for sure owing to the pricing of the resources for the production of the commodity. However owing to the fact that there is an established facility in this part of the globe the cost of capital investment and the quantum required to be invested with respect to the seed capital is expected to be lower respectively. However in case of this location the company’s past success with respect to existing products could create overconfidence which may lead to overly‐optimistic assumptions. This could influence on the funding decision with respect to the projects in which case the project may be funded in a less monitored manner leading to incremental costs respectively.
Capital Spend Analysis
The capital spend related to the higher costs related to the shipping finished exoloaders to customers/dealers in to the emerging markets needs higher capital investment. As the company needs to be concentrating on the Asian as well as South African markets, the logistics related investments would be higher when related pipelines need to be created in a sustainable manner. Hence, in this case although the investment of the company in production related assets is lower the investment related to creation of logistics related pipelines would be much higher.
Risks to the Overall Company
The main risk to the concerning this particular option in consideration is related to the potentially lengthy delivery times which would be necessary for satiation of the product related demand in Caterpillar’s...