Case Prompt
Our client, an accomplished city developer, has received an offer from the government to partake in a significant city-building venture set in a Middle Eastern desert. The specific proposal involves the construction of a water supply system. Your task is to evaluate whether our client should accept this project opportunity.
Exhibit
Exhibit 1: Costs of a Water Supply
| Facility | Upfront ($) | Fixed ($/year) | Variable ($/metric ton consumed) |
|---|---|---|---|
| Groundwater pump (extract) | 30,000,000 | 8,000,000 | 20 |
| Sanitization (sterilize) | 50,000,000 | 7,500,000 | 50 |
| Recharge basin (store) | 5,000,000 | 1,500,000 | 25 |
| Pipes (transport) | 3,000,000 | 1,500,000 | 10 |
| Wastewater treatment (recycle) | 20,000,000 | 7,500,000 | 35 |
| Other | 2,000,000 | 1,000,000 | 10 |
Background
Our client has an established record of water supply projects, although not in desert environments. The government has requested their involvement in building a water supply system in a desert city. The client is keen to achieve profitability within three years of completing the project.
Analysis
-
Facilities Analysis
Brainstorm the various facilities required for constructing a water supply system. -
Cost Estimation
Evaluate the total upfront costs involved in building the water supply system. Sum the expenses associated with different facilities. -
Break-Even Point Calculation
Calculate the point at which gains match losses to determine the break-even period for this investment. Utilize projected water consumption rates provided in Exhibit 2. -
Enhancing Break-Even Point
Explore strategies to shorten the time it takes to reach the break-even point, considering options to either decrease costs or increase revenue. -
Impact of Government Subsidy
Assess the influence of a 40% government subsidy on upfront costs on the decision-making process.
Final Analysis
I recommend that our client accept the city building project, contingent upon the government providing a 40% subsidy for the upfront costs. Without the subsidy, the break-even period would be five years, but this can be significantly reduced to three years with the government's support. Although our client lacks desert water supply experience, thorough research is recommended. Building a strong rapport with both the government and the city council is crucial. Alternatively, not pursuing the project is also viable due to potential risks and less attractive returns.
