W6_LUCKY_Business case for the establishment of an office in Warri

Problem Definition/Opportunity Statement

Justification for the establishment of an office in Warri

Problem/ Need Formulation and Evaluation

Commercial and operational trends are driving changes in business in the area. The establishment of an office in the area will have a major impact on our customers, products, processes, finance and the competition.

Feasible Alternatives

The following options are available for adoption:

·         Alternative A – Establish an office in Warri

·         Alternative B - Not to establish an office in Warri

Criteria Selection

Selection criteria of the alternatives are as follows[1]:

·         Affordable cost – within budget

·         Minimum – Office space(x3), Warehouse (x1), Workshop (x1)

·         Nearness to pipeline quality gas

·         Ease of accessibility from other major towns in the region

Selected Alternative

The selected alternative is to establish an office in Warri at a location that meets all the above mentioned criteria.

 

 

 

 

Financial Analysis

 

Project Financial Evaluation Worksheet
Project Title or Description:		ESTABLISHMENT OF AN OFFICE IN WARRI, DELTA STATE
	Year	0	1	2	3	4	5	6	7	8	9	10	Totals
	Calender Year	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
1	Capital Investment	735,461
	Operating Cash Flows
2	Revenue	7,922,253	9,506,704	11,408,045	13,689,654	16,427,584	19,713,101	0	0	0	0	0	78,667,341
3	Variable Cost (or COGS)	6,337,803	7,605,363	9,126,436	10,951,723	13,142,067	15,770,481	0	0	0	0	0	62,933,873
4	Gross Profit or Margin	1,584,451	1,901,341	2,281,609	2,737,931	3,285,517	3,942,620	0	0	0	0	0	15,733,468
5	Fixed Costs (or Sales & Admin)	792,225	950,670	1,140,804	1,368,965	1,642,758	1,971,310	0	0	0	0	0	7,866,734
6	Fixed Costs (R&D)	0	0	0	0	0	0	0	0	0	0	0	0
7	Depreciation (Tax)	0	73,546	132,383	105,906	84,725	67,810	54,203	48,173	48,173	48,246	72,296	735,461
8	Profit Before Tax (Net Profit)	792,225	877,124	1,008,421	1,263,059	1,558,033	1,903,501	(54,203)	(48,173)	(48,173)	(48,246)	(72,296)	7,131,273
9	Tax (no interest charge)	308,968	342,078	393,284	492,593	607,633	742,365	(21,139)	(18,787)	(18,787)	(18,816)	(28,195)	2,781,197
10	Profit After Tax	483,257	535,046	615,137	770,466	950,400	1,161,135	(33,064)	(29,385)	(29,385)	(29,430)	(44,100)	4,350,077
	Other Cash Flows
11	Capital Investment	(735,461)	0	0	0	0	0	0	0	0	0	0	(735,461)
12	Change in Working Capital	(396,113)	(79,223)	(95,067)	(114,080)	(136,897)	(164,276)	985,655	0	0	0	0	0
13	Depreciation (Tax)	0	73,546	132,383	105,906	84,725	67,810	54,203	48,173	48,173	48,246	72,296	735,461
14	Total Cash Annual Cash Flow	(648,316)	529,369	652,453	762,292	898,229	1,064,669	1,006,794	18,787	18,787	18,816	28,195	4,350,077
15	Discount Factor	1.00000	0.82645	0.68301	0.56447	0.46651	0.38554	0.31863	0.26333	0.21763	0.17986	0.14864
16	Discounted Cash Flow	(648,316)	437,495	445,634	430,294	419,030	410,476	320,796	4,947	4,089	3,384	4,191
17	Cumulative Cash Flow	(648,316)	(118,947)	533,506	1,295,798	2,194,027	3,258,696	4,265,490	4,284,278	4,303,065	4,321,881	4,350,077
	Payback avaluation	0	0	2	0	0	0	0	0	0	0	0
18	Net Present Value	1,832,021	( at	21.0%	discount rate)
19	Internal Rate of Return	63.0%	( with	10.0%	initial guess - increase or decrease to find a solution)
20	Payback (Years)	2	( Calc	ulated as the first non-zero year)
Base Assumptions
	Cost of Goods Sold/Price	80.0%
	Sales & Admin/Revenue	10.0%
	Typical Working Capital Rate	5.0%
	Income Tax Rate	39.0%
	Discount Rate	21.0%
Depreciation Schedule
	Assumed Gov't Allowable	0.0000	0.1000	0.1800	0.1440	0.1152	0.0922	0.0737	0.0655	0.0655	0.0656	0.0983
	Depreciation	0	73,546	132,383	105,906	84,725	67,810	54,203	48,173	48,173	48,246	72,296
Working Capital Schedule
	Working Capital Req't	396112.6615	475335.1938	570402.2326	684482.6791	821379.2149	985655.0579	0	0	0	0	0
	Change In Working Capital	396112.6615	79222.5323	95067.03876	114080.4465	136896.5358	164275.843	-985655.0579	0	0	0	0
	Working Capital Recovery	0	0	0	0	0	0	0	0	0	0	0
	Total WC Change	396112.6615	79222.5323	95067.03876	114080.4465	136896.5358	164275.843	-985655.0579	0	0	0	0

 

Sensitivity Analysis

The project viability depends on the volume of business generated with the customers in this region.

Sensitivity analysis to proposed contingencies given that the volume of business is tending to low includes:

o   Look for other type of business solution offers

o   Re-invigorate marketing strategy for other lines of our business

o   Continue to showcase our current level of contract performance with a view to attracting more business

o   Enter into price agreement with customer for new lines of products

 

Sensitivity analysis to proposed cost savings failing to materialize includes:

o   Re-evaluate work procedures and methodology

o   Re-evaluate staff engagement status

o   Reassign job roles and personnel

o   Re-training

Conclusion

This business case recommends the establishment of an office comprising office spaces, a workshop and warehouse at Warri, Delta State, Nigeria that will save 20% in service costs.

This schedule will enable the company to realize the project’s net present value of

$4,900,017.00 by July 1, 2020 – better still $1,152,863.00 by July 1, 2013.

The office establishment will cost an estimated USD242, 446.60 in the first year, (CAPEX and OPEX inclusive).

The payback period is 1 year.

References:

1.       Sullivan, W., Wicks, E., Koelling, P., Kumar, p., & Kumar, N. (2012). Engineering economy (15^th edition). England: Pearson Education Limited.

2.      Purdue OWL APA style, (2011). APA formatting and style guide. Retrieved from http://owl.english.purdue.edu/owl/resource/560/19/

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[1] Sullivan, W., Wicks, E., Koelling, P., Kumar, p., & Kumar, N. (2012). Engineering economy (15^th edition). England: Pearson Education Limited.