Emergency Power Project - Case Study
Current Business Report Emergency Power Sdn. Bhd. (EPSB) supplies back-up power to commercial sector, when the commercial companies, municipals and private functions require back up power for their activities. The company is equipped with 300 kW generator which is connected to a trailer which enable the diesel generator to be moved to the locations where it is required The company has been on the business for the last two years. The diesel is manned by two electricians and one driver. Monthly, the company received request for power back-up for about 20 days with each service range between 8 to 12 hours. On the average, the total of 6,000 kWh provides to clients monthly. The investment cost for the trailer and accessories is RM600,000. The investment cost is sourced from bank loan to be recovered within 3 years with interest rate of 10% per annum The demand for the back-up power has been on an increase. It is estimated that the direct cost from diesel 50 % of the revenues. The annual revenues for the company are shown in TABLE 1, where FY2018/2019 are actual values while FY2020 is a projection. TABLE 1: Emergency Power Supply Original Business Revenues (annual statement of income) FY2018 FY2019 FY2020 (Present) 780,000 794,000 820,000 Revenue (RM) Power sales Direct Cost (RM) Diesel Gross Profit (RM) Gross Margin (%) 390,000 390,000 50 390,000 390,000 410,000 410,000 50 50 As expected, salary and rental would form a significant portion of the operating expenditure. Utilities, transportation, equipment repair and general maintenance also form part of the costs. Other forms of commitment including tax, legal fee etc. is lumped into miscellaneous expenses. All budgeted expenses are tabulated in TABLE 2. For simplicity in analyzing the business profitability, the expenses are calculated based on the budgeted value rather than the actual costs. TABLE 2: EPSB Original Expenses (monthly estimations) Cost Item Shop Rental Descriptions RM2000 per month for 3 years and will increase by 10% in 2021. 2% of total revenue Utilities & Transportation Repair & Maintenance IT Services Staff Salary RM500 per month for 3 years and will increase by 10 % in 2021 RM300 per month for 3 years and will increase by 10 % in 2021 RM100 per day for 22 per month for 3 persons in 2018 and increase by 5% every year onward RM200 per day for 22 per month for 1 person in 2018 and increase by 5% every year onward RM800 Owner Salary Miscellaneous (tax, legal etc.) Business Expansion Plan EPSB plans to expand the company business. The plan is to procure another set of diesel generator and a trailer. The estimated investment required is RM650,000. The investment cost as bank loan to be recovered within 3 years with interest rate of 10% per annum. Here, EPSB needs to know how good business is (effective rate of return) how much the business is worth (if the company MARR is 15%). The projected annual revenues and operation costs are shown in TABLE 3. TABLE 3: Projected EPSB New Business Revenues (annual statement of income) FY2018 FY2019 FY2020 (Present) 1,170,000 1,236,000 1,300,000 Revenue (RM) Power sales Direct Cost (RM) Diesel Gross Profit (RM) Gross Margin (%) 585,000 585,000 618,000 618,000 650,000 650,000 50 50 50 TABLE 4: Estimated Monthly EPSB New Business Expenses Descriptions RM2000 per month for 3 years. 3% of total revenue Cost Item Shop Rental Utilities & Transportation Repair & Maintenance IT Services Staff Salary RM500 per month for 3 years RM300 per month for 3 years RM100 per day for 22 per month for 6 persons in 2021 and increase by 5 % every year onward RM200 per day for 22 per month for 1 person in 2021 and increase by 5% every year onward RM1000 Owner Salary Miscellaneous (tax, legal etc.) The company needs to prepare the sensitivity analysis in fluctuation of direct cost following margin fluctuation from 50% to 70%. Preparation of Business Expansion Brief The company needs your assistance in preparing a business brief to highlight the health of the business and the merit to expand business venture. For the case study provided, you are expected to study and prepare a project brief that must include (but not limited to) the following steps of economic analysis: 1. Summary of project design requirement and constraints. 2. List and discuss project completion alternatives and cost impact. 3. State assumptions and project constraints. 4. Tabulate all costs and benefits expected. 5. Report on comparative analysis of potential options available 6. Identify critical factors that can influence decision through sensitivity analysis 7. Provide recommendation of the most attractive options and indicate potential areas of concern
