# Genesis Energy Capital Plan Report

Genesis Energy Capital Plan Report

B6022: Financial Management

Argosy University, Twin Cities

Genesis Energy Capital Plan Report

The Genesis Energy operations management team, nearing completion of its agreement with Sensible Essential Consulting, was asked by senior management to present a capital plan for the operating expansion (Argosy University Online, 2018). The capital plan is to be an analysis of the necessary costs associated with successfully establishing a fully equipped operating facility in an overseas market; Senior management is requesting meaningful financial and operating metrics to ensure that the performance objectives for the facility are being met (Argosy University Online, 2018).

Weighted Average Cost of Capital

In order to calculate the firm’s weighted average cost of capital, a capital budgeting spreadsheet is to be utilized. With this spreadsheet, we are able to prepare and analyze each planned capital expenditure and determine the best project option for Genesis Energy. By utilizing the spreadsheet, we are also able to calculate the periodic and cumulative net cash flows for each potential project and it’s options. There are five available projects with multiple configurations, which include the facility, equipment pieces 1, equipment pieces 2, equipment pieces 3, and internal inspection (Argosy University Online, 2018). Our job is to evaluate, rank, and recommend the capital expenditures according to beneficial value to the organization, using tools such as the NPV, payback, and IRR (Argosy University Online, 2018).

According to the spreadsheets and the necessary calculations, it appears that project C at the 75-emp facility is the highest cash flow option as far as the ventures go for Genesis Energy; This project has the highest cash inflow from year 1 to year 10, and yields the highest return in comparison to the initial investment. This venture has an NPV of -\$2,265.69, which was computed using the table below; This NPV implies that Genesis Energy will not likely get adequate return to consider the project profitable or worthwhile. The PV would be \$932.92 at the end of the 10-year period.

WACC12.39%     Formula & Results
Y0 (\$3,000.00)   -3,000 / [(1 + 12.39%)^0] = (\$3,000.00)
Y1   (\$300.00) -300 / [(1 + 12.39%)^1] = (\$266.93)
Y2   (\$400.00) -400 / [(1 + 12.39%)^2] = (\$316.67)
Y3   (\$100.00) -100 / [(1 + 12.39%)^3] = (\$70.44)
Y4   \$600.00 600 / [(1 + 12.39%)^4] = \$376.05
Y5   \$700.00 700 / [(1 + 12.39%)^5] = \$390.35
Y6-10   \$2,000.00 2,000 / [(1 + 12.39%)^10] = \$621.95
(\$2,265.69)
WACC12.39%     Formula & Results
Y10 (\$3,000.00)   3,000 x [1 / (1 + 12.39%)^10] = 932.92
\$932.92

In the equipment section, it appears that the highest cash flow options in comparison to their initial investments after the 10-year period come from the manual equipment in the first equipment section, the top of line equipment in the second equipment category, and the five-man machine in the third equipment category. The first equipment section leads us to an NPV of \$18.76, the second brings us to -\$757.92 as its NPV, and equipment 3 suggests an NPV of -\$490.14. These calculations are displayed in the tables below. This negative NPV illustrates a less than desirable venture.

WACC12.39%     Formula & Results
Y0 (\$750.00)   -750 / [(1 + 12.39%)^0] = (\$750.00)
Y1   \$150.00 150 / [(1 + 12.39%)^1] = \$133.46
Y2   \$150.00 150 / [(1 + 12.39%)^2] = \$118.75
Y3   \$150.00 150 / [(1 + 12.39%)^3] = \$105.66
Y4   \$150.00 150 / [(1 + 12.39%)^4] = \$94.01
Y5   \$150.00 150 / [(1 + 12.39%)^5] = \$83.65
Y6-10   \$750.00 750 / [(1 + 12.39%)^10] = \$233.23
\$18.76
WACC12.39%     Formula & Results
Y0 (\$1,500.00)   -1500 / [(1 + 12.39%)^0] = (\$1,500.00)
Y1   (\$100.00) -100 / [(1 + 12.39%)^1] = (\$88.98)
Y2   \$100.00 100 / [(1 + 12.39%)^2] = \$79.17
Y3   \$200.00 200 / [(1 + 12.39%)^3] = \$140.88
Y4   \$400.00 400 / [(1 + 12.39%)^4] = \$250.70
Y5   \$200.00 200 / [(1 + 12.39%)^5] = \$111.53
Y6-10   \$800.00 800 / [(1 + 12.39%)^10] = \$248.78
(\$757.92)
WACC12.39%     Formula & Results
Y0 (\$750.00)   -750 / [(1 + 12.39%)^0] = (\$750.00)
Y1   (\$300.00) -300 / [(1 + 12.39%)^1] = (\$266.93)
Y2   (\$200.00) -200 / [(1 + 12.39%)^2] = (\$158.33)
Y3   \$300.00 300 / [(1 + 12.39%)^3] = \$211.32
Y4   \$400.00 400 / [(1 + 12.39%)^4] = \$250.70
Y5   \$400.00 400 / [(1 + 12.39%)^5] = \$223.10
(\$490.14)

Performance Measures

Performance measurement is an important consideration for any organization, as it assists in ensuring that not only the best practices are identified and expanded and resources are allocated adequately, but also that these processes are compared to other organizations within the industry and that they are a part of a strategic plan (Association Forum, 2013) For Genesis Energy, we are to construct and recommend between three and five metrics to measure the performance of the organization; Some measures that immediately come to mind are profit and growth, cost reduction, and customer satisfaction. The effects of organizational growth, increased profits, and cost reduction are all directly correlated to dividend decision-making (Argosy University Online, 2018). When the business thrives and costs are reduced, more money goes back to the shareholders and is invested back into the company.

Additionally, Genesis Energy is requesting three to five recommendations for metrics which measure the performance of the new operating strategy, which is to successfully establish a fully equipped operating facility overseas (Argosy University Online, 2018). A few of metrics or measures that come to mind are initial market traction, competitive victories, and capital efficiency (Association Forum, 2013). All of these metrics largely reflect the dividend policy, or the set of guidelines that establish how much earnings will be paid out to shareholders, in the sense that if Genesis Energy’s initial penetration into the foreign market goes well, they may decide to put earnings back into the company in hopes it will really take off; This will decrease the earnings going directly back to the shareholders.

Summary

Finally, we must prepare an executive summary for Genesis Energy describing the recommendations for each project and the overall cost, net cash flows, and expected returns of the operating configuration recommended (Argosy University Online, 2018). In a perfect world, the right option for Genesis Energy would stand out like a sore thumb and have minimal risk; However, that is not the case here. Each viable option has its benefits and disadvantages, and the recommendations are therefore difficult to suggest. With the end goal of successfully developing and establishing a fully equipped operating facility overseas, Genesis Energy has a lot to think about. They must consider not only initial market traction, competitive victories, and capital efficiency, but also profit and growth, cost reduction, and customer satisfaction in their venture decision.

As is pertains to the Capital Budget spreadsheet, Genesis Energy should consider the venture that includes project C and the 75-emp facility, manual, top of the line, 5-man machine equipment with in-house inspection. With this option, Genesis Energy will incur the most cash flow for the initial investment amount, which will help them retain earnings to invest back into the venture or give back to shareholders. The full cost of this venture would include an initial investment of \$3,000 for the facility, \$3,750 for the equipment package, and \$1,800 for the in-house inspecting, totaling \$8,550 (Argosy University Online, 2018). While these options require the largest initial investment, they will also provide the best cash flow for the firm throughout the 10 years. The IRR for project C is -2.21 percent, whereas project A is -9.16 percent and project B is -2.88 percent; Thus, project C, while not exceptionally profitable, appears to be the most viable option.

Additionally, Genesis Energy can utilize the payback method to determine which investment cover its costs the quickest. Many companies use the weighted average cost of capital if the project’s risk profile is similar to that of the company (Discount Rate, 2018). When using the WACC, we can determine the payback period for each investment as it compares to the alternatives. Here, you can see that project C, manual, top of the line, 5-man machine equipment and in-house inspection is the quickest way for Genesis Energy to cover it’s initial investment cost. This further implies that this is the venture that Genesis Energy should consider.

 Project Payback Period A Over 10 Years B Over 10 Years C 5.25 Years Equipment 1 Fully Automatic 9.38 Years Semi-Automatic 5.75 Years Manual 5.00 Years Equipment 2 Standard 5.92 Years Top of the Line 6.17 Years Equipment 3 3-Man Machine 6.36 Years 2-Man Machine 12.00 Years 5-Man Machine 6.25 Years Inspection In-House 5.63 Years Contract No Initial Investment

References

Argosy University Online. (2018). Financial management. B6022: Module 5.