RISK FINANCING

PLEASE READ THE QUESTION AND ANSWER EVERYTHING IN FULL.

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QUESTION 4 (52 MARKS)

CASE STUDY

ACME Manufacturing Ltd

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 120MWh 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 6.5MWh.

The graph below illustrates the budgeted and actual electricity usage for ABC Manufacturing Ltd for 2023. The 10MWh 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 13.5MWh, of which they were able to generate 6.5MWh. The estimated loss of production due to electricity shortages was R12m.

ABC Ltd: Electricity usage in MW for 2023 11 10 9 8 Required 7 - - - Actual 6 5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec