The date is Friday July 1, 2022. Your company, the Coastal Petroleum Company, is faced with...

  

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The date is Friday July 1, 2022. Your company, the Coastal Petroleum Company, is faced with a critical decision, and your boss (who was instrumental in your hiring at Coastal) has been bragging about you (because of your considerable financial expertise from Cal Poly) as the person most able to help Coastal management carefully evaluate and make the best decision. Coastal management is currently considering construction of new terminal and tank farm facilities to supply its customers in Northeast Florida. Coastal has been receiving, storing, and distributing Bunker #2 Heating Oil using facilities leased from the Gateway Oil Company in Jacksonville, Florida. However, Coastal just learned that Gateway will likely not renew this throughput agreement when it expires in December 31, 2022. After investigating a number of possible arrangements, Coastal's management has concluded that there are basically two feasible alternatives. The company could either construct its own facilities, or cease operations in Northeast Florida. Although Coastal is reluctant to abandon its customers, the company policy clearly requires that all investments in new facilities must provide a minimum after tax return of 14% (Coastal's MARR). This is where you come in. Your assignment is to prepare an Authorization for Capital (AFC) report that will enable Coastal management to make the best decision. (and remember your boss's credibility is at stake.) Engineering estimates indicate that the new facilities will cost $8,500,000 to construct and will have a useful life of 20 years. For tax purposes, these new facilities can be depreciated over the MACRS 10-year class life allowed for other petroleum equipment. The terminal is to be built on land leased from the Jacksonville Port Authority. Rent and wharf charges to the Port Authority are expected to total $350,000 per year under the terms of a 10 year lease; and the lease has options to renew for an additional 10 year period at the same rate. If construction is started by August 1, 2022, then Engineering expects that the new facilities will be ready for operation by the end of the year 2022. As a simplifying assumption, you can assume that construction of the new facilities will be under a bid contract, and that all payments under the contract will be made at the end of the construction period - 12-31-22. Trucks and other vehicles that are now in use can be used at the new facility, if it is built. It is estimated that at the end of 2022 this equipment will have a fair market value of $500,000 and a book value of $325,000 depreciable over the following five years using the straight line method. New equipment for the facility will also be purchased during the life of the project. Computer systems will be upgraded every 5 years (initial systems are included in the initial facilities cost of $8.50 million). The cost of each subsequent new computer system is assumed to be $75,000 per installation. Depreciation on these systems will be using MACRS with an appropriate class life for computers. After the new facility is placed in service, it is expected that some additional equipment replacement (pumps and tanks) will have to take place half-way through the expected life of 20 years. This equipment is expected to cost $1,500,000, and may be depreciated using MACRS with a class life of 10 years. In addition, trucks will have to be purchased every year starting in the first year of operation. They will cost a total of $175,000 each year and will be depreciated with MACRS using a class life of 5 years. The sales volume of Bunker #2 Heating Oil is expected to total 2.0 million barrels in 2023 (as forecast for the Gateway facilities). In 2024, the sales volume is expected to remain the same as in 2023, and in subsequent years is expected to increase at a rate of about 3.5% per year for six years at which time the sales volume will be assumed to be level for the remainder of the life of the project. Coastal's profit is a function of the cost of oil when they sell to their own customers. A profit of 4.0% is added to the cost of oil. Initial planning shows the forecasted cost of oil to Coastal will be $85.00 per barrel (cost of goods sold), but you have seen recently in the news that oil prices have jumped all over the place. You believe that inflation and limited supply will probably cause the oil to go up in cost to Coastal by about 1.5% per year over a planning horizon of 20 years. Accounting says the effective tax rate for Coastal should be considered to be 30%, but you are concerned that this rate is dependent up the presidential administration in place. The company will need some working capital to sustain its operations for either alternative. A general formula for the level of working capital needed has been found to be about 12% of gross sales revenue forecasted for the year. This working capital is needed at the beginning of the year for which the forecast is made. The level of working capital needed will change depending on the forecasted change in sales revenue. You will need to calculate a schedule for the amount of working capital which will be needed over the 20 years of this project. Working capital is considered an additional necessary investment from after tax dollars, but is not tax deductible. In your cash flow analysis, you will need to distinguish between the following three types of expenditures: 1) expenses (which are tax deductible in the current year), 2) capital investments (which are "deductible" over multiple years through depreciation), and 3) working capital (which is like a capital investment, but is not deductible). Additional expenses for the project will include operating expenses, which are expected to be $525,000 per year to start, with an increase of 3.5% each year over the life of the project. (Note: depreciation is an expense for tax purposes only.) Your boss and Coastal Executive Management (CEM) expect you to complete the AFC within four weeks so they can make a timely decision. The AFC must clearly show the engineering economic analysis for the alternatives, clear recommendations for REM action, and an insightful uncertainty/sensitivity analysis that clearly shows under what conditions your recommendations to REM would be reversed. The results of your analyses and recommendations are to be presented in a professionally done, easy to read, comprehensive, written report. You will need to fully explain your results in text explanations and visuals, and not just provide tables of numbers. The date is Friday July 1, 2022. Your company, the Coastal Petroleum Company, is faced with a critical decision, and your boss (who was instrumental in your hiring at Coastal) has been bragging about you (because of your considerable financial expertise from Cal Poly) as the person most able to help Coastal management carefully evaluate and make the best decision. Coastal management is currently considering construction of new terminal and tank farm facilities to supply its customers in Northeast Florida. Coastal has been receiving, storing, and distributing Bunker #2 Heating Oil using facilities leased from the Gateway Oil Company in Jacksonville, Florida. However, Coastal just learned that Gateway will likely not renew this throughput agreement when it expires in December 31, 2022. After investigating a number of possible arrangements, Coastal's management has concluded that there are basically two feasible alternatives. The company could either construct its own facilities, or cease operations in Northeast Florida. Although Coastal is reluctant to abandon its customers, the company policy clearly requires that all investments in new facilities must provide a minimum after tax return of 14% (Coastal's MARR). This is where you come in. Your assignment is to prepare an Authorization for Capital (AFC) report that will enable Coastal management to make the best decision. (and remember your boss's credibility is at stake.) Engineering estimates indicate that the new facilities will cost $8,500,000 to construct and will have a useful life of 20 years. For tax purposes, these new facilities can be depreciated over the MACRS 10-year class life allowed for other petroleum equipment. The terminal is to be built on land leased from the Jacksonville Port Authority. Rent and wharf charges to the Port Authority are expected to total $350,000 per year under the terms of a 10 year lease; and the lease has options to renew for an additional 10 year period at the same rate. If construction is started by August 1, 2022, then Engineering expects that the new facilities will be ready for operation by the end of the year 2022. As a simplifying assumption, you can assume that construction of the new facilities will be under a bid contract, and that all payments under the contract will be made at the end of the construction period - 12-31-22. Trucks and other vehicles that are now in use can be used at the new facility, if it is built. It is estimated that at the end of 2022 this equipment will have a fair market value of $500,000 and a book value of $325,000 depreciable over the following five years using the straight line method. New equipment for the facility will also be purchased during the life of the project. Computer systems will be upgraded every 5 years (initial systems are included in the initial facilities cost of $8.50 million). The cost of each subsequent new computer system is assumed to be $75,000 per installation. Depreciation on these systems will be using MACRS with an appropriate class life for computers. After the new facility is placed in service, it is expected that some additional equipment replacement (pumps and tanks) will have to take place half-way through the expected life of 20 years. This equipment is expected to cost $1,500,000, and may be depreciated using MACRS with a class life of 10 years. In addition, trucks will have to be purchased every year starting in the first year of operation. They will cost a total of $175,000 each year and will be depreciated with MACRS using a class life of 5 years. The sales volume of Bunker #2 Heating Oil is expected to total 2.0 million barrels in 2023 (as forecast for the Gateway facilities). In 2024, the sales volume is expected to remain the same as in 2023, and in subsequent years is expected to increase at a rate of about 3.5% per year for six years at which time the sales volume will be assumed to be level for the remainder of the life of the project. Coastal's profit is a function of the cost of oil when they sell to their own customers. A profit of 4.0% is added to the cost of oil. Initial planning shows the forecasted cost of oil to Coastal will be $85.00 per barrel (cost of goods sold), but you have seen recently in the news that oil prices have jumped all over the place. You believe that inflation and limited supply will probably cause the oil to go up in cost to Coastal by about 1.5% per year over a planning horizon of 20 years. Accounting says the effective tax rate for Coastal should be considered to be 30%, but you are concerned that this rate is dependent up the presidential administration in place. The company will need some working capital to sustain its operations for either alternative. A general formula for the level of working capital needed has been found to be about 12% of gross sales revenue forecasted for the year. This working capital is needed at the beginning of the year for which the forecast is made. The level of working capital needed will change depending on the forecasted change in sales revenue. You will need to calculate a schedule for the amount of working capital which will be needed over the 20 years of this project. Working capital is considered an additional necessary investment from after tax dollars, but is not tax deductible. In your cash flow analysis, you will need to distinguish between the following three types of expenditures: 1) expenses (which are tax deductible in the current year), 2) capital investments (which are "deductible" over multiple years through depreciation), and 3) working capital (which is like a capital investment, but is not deductible). Additional expenses for the project will include operating expenses, which are expected to be $525,000 per year to start, with an increase of 3.5% each year over the life of the project. (Note: depreciation is an expense for tax purposes only.) Your boss and Coastal Executive Management (CEM) expect you to complete the AFC within four weeks so they can make a timely decision. The AFC must clearly show the engineering economic analysis for the alternatives, clear recommendations for REM action, and an insightful uncertainty/sensitivity analysis that clearly shows under what conditions your recommendations to REM would be reversed. The results of your analyses and recommendations are to be presented in a professionally done, easy to read, comprehensive, written report. You will need to fully explain your results in text explanations and visuals, and not just provide tables of numbers.

Answer rating: 100% (QA)

The following is an Authorization for Capital AFC report that will enable Coastal management to make ... View the full answer