Chicago Valve

Although he was hired as a financial analyst after completing his MBA, Richard Houston’s first

assignment at Chicago Valve was with the firm’s marketing department. Historically, the major

focus of Chicago Valve’s sales effort was on demonstrating the reliability and technological

superiority of the firm’s product line. However, many of Chicago Valve’s traditional customers

have embarked on cost-cutting programs in recent years. As a result, Chicago Valve’s marketing

director asked Houston’s boss, the financial VP, to lend Houston to marketing to help them

develop some analytical procedures that the sales force can use to demonstrate the financial

benefits of buying Chicago Valve’s products.

Chicago Valve manufactures valve systems that are used in a wide variety of applications,

including sewage treatment systems, petroleum refining, and pipeline transmission. The complete

systems include sophisticated pumps, sensors, valves, and control units that continuously monitor

the flow rate and the pressure along a line and automatically adjust the pump to meet pre-set

pressure specifications. Most of Chicago Valve’s systems are made up of standard components,

and most complete systems are priced from $100,000 to $250,000. Because of the somewhat

technical nature of the products, the majority of Chicago Valve’s sales people have a background

in engineering.

As he began to think about his assignment, Houston quickly came to the conclusion that the

best way to “sell” a system to a cost-conscious customer would be to conduct a capital budgeting

analysis which would demonstrate the cost effectiveness of the system. Further, Houston

concluded that the best way to begin was with an analysis for one of Chicago Valve’s actual

customers.

From discussions with the firm’s sales people, Houston concluded that a proposed sale to

Lone Star Petroleum, Inc. was perfect to use as an illustration. Lone Star is considering the

purchase of one of Chicago Valve’s...