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Hard Investment Decision

New Rubber Plant Investment

#Public Sector
ProHub Comment

This is a complex investment decision case for a government entity that requires balancing financial analysis with non-financial factors like employment and regional development. The key challenge is identifying operational bottlenecks (particularly transportation constraints) that limit profitability despite strong demand, and assessing both security risks and economic benefits to justify the $12M rejuvenation investment.

Estimated Time 15 minutes
Difficulty Hard
Source Wharton
50 / 100
The federal government of a country in a certain part of the world is investigating whether to restart a rubber factory in the western part of the country. The factory was operational in the past, but has not been used for 7 years. The plant was closed due to terrorism in the area which has now come down significantly, though there are still skirmishes reported in the area. If rejuvenated, the plant may become a target for the rebels. All the equipment is considered usable but the government still estimates they would need to spend $12M to rejuvenate the plant which would enable the plant to product up to 10M lbs of rubber per month. The demand of rubber worldwide is strong but rubber must be transported to an export port via trains; up to 2 trains per day can be used for this purpose.

Clarifying Information

  1. Raw Materials – Production of rubber requires gum resin. 3lbs of resin after processing results in 1lb of rubber.
  2. Operations – The resin needs to be transported from the capital. Up to 4 trains can be used for the same.
  3. Pricing – Rubber can be sold at $20 per lb. Gum resin costs $5 per lb.
  4. Suppliers – We have identified one supplier.
  5. Customers – We would be selling the rubber in the commodity market to the entire world.