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UVA-QA-0424
Roadway Construction Company

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UVA-QA-0424

ROADWAY CONSTRUCTION COMPANY

In late August 1989, David Black, president of Roadway Construction Company, was
preparing his 1990 capital-budgeting recommendation. Paramount in his mind was the recently
announced $9.25 billion Georgia highway program and the opportunities for growth that this
program represented for Roadway. The most immediate need would be for another asphaltmanufacturing plant.

The New Highway Program

The August 3, 1989, issue of a contracting industry bulletin described the Georgia
highway plans as follows:
Its time to breathe a sigh of relief and celebrate! The state legislature approved,
on July 27, a funding plan to raise $9.25 billion for road construction over the
next 13 1/2 years.... The legislation sets up a state highway trust fund to four-lane
some 1,800 miles of the intrastate highway system. This will put 90% of the
states population within 10 miles of a four-lane highway.... Under the program,
all or portions of seven urban loops will be completed and 10,000 miles of
unpaved secondary roads will be paved.... The new funding is in addition to the
annual state highway construction program, which amounts to approximately
$400 million.

Roadway
Roadway Construction Company, a division of Southern Highways, Inc., was a wholly
owned subsidiary of the Fortune 500 conglomerate, whose core business was the refining and
marketing of petroleum products. Southern provided corporate management for 20 companies
similar to Roadway located in the southern half of the United States from Virginia to California.

This disguised case is based on an actual business situation and was prepared by Douglas L. Schwartz (MBA 90)
under the supervision of Robert L. Carraway, Associate Professor of Business Administration. It was written as a
basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright 1991 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means
electronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School
Foundation. Rev. 10/91.

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UVA-QA-0424

These divisions were grouped geographically into six regions, each managed by a regional vice
president who reported to the president of Southern Highways, Inc.
The Roadway division operated three branches, maintained six operating/marketing
offices, and ran eight asphalt-manufacturing plants. It competed with 13 similar contractors, who
operated 26 asphalt plants. Roadway provided earth grading, drainpipe installation, stone-base
placement, asphalt paving, and curb gutter construction in 20 counties in eastern Georgia. The
work contributed to the completion of federal and state highways; city, county, subdivision, and
military base streets; airport runways, sites for manufacturing plants and commercial building,
parking lots, and residential driveways. Roadway was the primary provider of these services in
that area with a 40% market share) and had annual revenues in excess of $40 million.
Roadways main source of revenue was the manufacture and placement of asphaltic
concrete (hot-mixed asphalt), the product that constituted the traveling surface of asphalt streets
and highways. All other company functions operated to support this primary business. Asphaltic
concrete was manufactured by mixing specifically sized and blended crushed stone and sand that
have been dried and heated to approximately 300 degrees Fahrenheit in a rotating kiln with 4%
to 6% liquid asphalt (the residual of the manufacture of all other petroleum products). When
placed on the roadway and properly compacted, this mixture produced a smooth and durable
riding surface. Roadway manufactured and placed approximately 700,000 tons per year and sold
approximately 40,000 tons per year to smaller competitors. This asphaltic concrete was produced
by seven nonportable batch plants strategically located within the market area and one
continuous type of portable drum-mix plant. While the basic raw materials of liquid asphalt and
crushed stone were purchased, Roadway produced its own sand.
Strategic location was the key competitive consideration in the asphalt-paving business.
All competitors could purchase raw materials, manufacture the product, and place the asphalt
within the ranges of their workforce, equipment, and management efficiency. Competitive
advantage lay in situating the asphalt plant in the optimum location relative to both the sources
of the raw materials and the location of a project. The raw materials and the hot-mixed asphalt
were transported by trucks, and because the mixed asphalt had to be placed and compacted
before it cooled below 250 degrees, transportation time was limited to between to between 2 and
6 hours, depending on weather conditions.

The Decision Process

The divisions operated with a great deal of autonomy, and most management decisions
were made independently by a division president. Through close communication over time with
Charlie Meadows, his regional vice president, David Black knew the broad parameters within
which he could operate independently. He consulted with Meadows only on decisions outside
those established bounds. Generally, irregular purchases that exceeded $100,000 received close
scrutiny and required a financial analysis to determine the net present value (NPV), payback,
profitability index (the ratio of the present value of future cash flows divided by the initial

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UVA-QA-0424

investment), and internal rate of return (IRR). Once the available funds were approved, the
specific purchases were prioritized, with considerable weight given to the division presidents
recommendations. Upon final approval, the actual purchase commitments were made by the
division president.
Black was reviewing the asphalt plant decision in preparation for his meeting with
Meadows next month in Marietta, Georgia. At that time, Black was expected to make and then
justify his recommendations.

The New Asphalt Plant

Two asphalt plants were available for expanding Roadways capacity to meet the needs
of the new highway program for the next 10 years: a new portable drum plant and a used-batch
plant from one of the other divisions. Each plant would have 150,000 tons per year of asphaltproducing capacity with a mix value of $23 per ton. The two options differed primarily in cost
and service life.
The batch plant would cost $700,000 (plant erection and site preparation), have a 5-year
life, and a $100,000 salvage value at the end of the 5 years. The raw materials for this plant were
expected to cost $14.00 per ton (with sand, crushed stone, and liquid asphalt combined). The
operating costs were expected to be $2.50 per ton, and the maintenance and repair costs were
expected to be $1.00/ton.
The drum plant would cost $1.5 million (plant erection, and site preparation), have a 10year life, and have a $300,000 salvage value at the end of the 10 years. This plant had a raw
material advantage over any batch plant, because it could utilize up to 30% RAP (recycled
asphalt product) whereas a batch plant could use only 12% to 15% RAP. Thus, raw material
costs for a drum plant were only $12.75/ton. Currently, competitors operated five drum-mix
plants in the Roadway market area, which put Roadway at a cost disadvantage when bidding
against those competitors. Additionally, because the drum plant was brand new, maintenance
costs would be only $0.50 ton, and operating costs were expected to be as little as $2.00/ton. The
drum plant also had a nonquantifiable advantage as a striking arm for new markets because of
its highly portable capabilities.
Wear and tear was expected to increase maintenance costs for the plants by 10% per year.
Operating costs were expected to go up by 4% a year over the useful lives of the two plants.
Roadway currently used a 12% hurdle rate for all capital investments, was taxed at an effective
rate of 38%, and handled all depreciation on a straight-line basis for making investment
decisions.