Textbook Problem

Capital expenditures budget

On January 1, 2016, the controller of Omicron Inc. is planning capital expenditures for the years 2016-2019. 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 2015 for the construction of a new factory building at a contract cost of $10,000,000. The construction is scheduled to begin in 2016 and be completed in 2017.

Vice President of Manufacturing Once the new factory budding is finished, we plan to purchase $1.5 million in equipment in late 2017.1 expect that an additional 5200.000 will be needed early in the following year (20181 to test and install the equipment before we can begin production If sates continue to grow. I expect we'll need to invest another $1,000,000 in equipment in 2019.

Chief Operating Officer: We have really been growing lately I wouldn't be surprised if we need to expand the size of our new factory building m 2019 by at least 35%. Fortunately, we expect inflation to have minimal impact on construction costs over the next four years. Additionally, I would expect the cost of the expansion to be proportional to the size of the expansion

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 2018, once the factory is up and running, we should equip the whole facility with wireless technology. I think it would cost us $800,000 today to install the technology. However, prices have been dropping by 25% per year, so it should be less expensive at a later date.

Chief Financial Officer: I am excited about our long-term prospects. My only short-term concern is managing our cash flow while we expend the $4,000,000 of construction costs on the portion of the new factory building scheduled to be completed in 2016.

Use this interview information to prepare a capital expenditures budget for Omicron Inc. for the years 2016-2019.