South Africa has experienced significant power outages since $2008$ when the national electricity grids started to experience increased demand and a lack of capacity. Electricity supply has been under pressure in South Africa since $2008.$ Large electricity users such as ABC Manufacturing Ltd had to reduce their electricity usage which also effected production as the main production plant had to be shut down intermittently. Management was able to reduce the $120$MWh electricity requirement at full capacity with $+5\%$ by supplementing electricity supplied by the national grid with its own diesel$-$powered generators. The maximum capacity of the current configuration of generators is of $6\mathrm{.}5$MWh$.$

The graph below illustrates the budgeted and actual electricity usage for ABC Manufacturing Ltd for $2023.$ The $10$MWh budget per month includes the electricity used for the production activities, plant, offices, and the computer network. The chief engineer calculated that the enterprise had to generate its own electricity for $13\mathrm{.}5$MWh$,$ of which they were able to generate $6\mathrm{.}5$MWh$.$ The estimated loss of production due to electricity shortages was R$12$m$.$ The cost to purchase $1$MWh of electricity from the national grid is approximately R$1550,000.$ The cost to produce $1$MWh with the backup diesel generators is approximately R$2250000.$ However, Raw Diamond Ltd$,$ a coal mine, near ABC, generates surplus electricity that can supply the shortfall. Raw Diamond is prepared to sell the surplus capacity at R$1800000$ per MWh to ABC at a premium of $1\%$ of the strike price. The duration of the options will be for six months at a time and ABC will be able to exercise a portion e$.$g$.500$KWh but will still be responsible for the full premium.

The capital outlay to install generators to produce sufficient electricity will be R$10$m$.$ The running costs will be R$2250000$ per MWh as indicated above. The directions from the board indicated that total cost $($capital and operating cost$)$ must not exceed the production loss for $2023$ of R$12$m$.$ Depreciation of the generators will be R$2000000$ per year over a five$-$year period.

It is clear from the case study that power outages have had an adverse effect on the production of ABC in $2023.$ Evaluate the two alternatives as stated in the case study and make a

recommendation to the board regarding the most appropriate alternative or combination to ensure business continuation. Use cashflow for your answer. You can ignore tax and depreciation for the purpose of the calculation. Show all calculations.

Your answer should include the following:

$$ Characteristics of the solutions $(22$ marks$)$

o Total cost per solution

o Expected advantages$/$disadvantages of the solution.

$$ Recommendation