Table of Contents
Scenario
You have decided that there are not enough beer varieties in the world, and that you are only who can fix this problem. Against the urging of your spouse and friends, you decide to open up a brewery. You have two options: build your own brewery from the ground up or buy an existing one from a fellow dreamer like yourself who has become disillusioned with the business. The existing brewery will need some new equipment and repairs before it can be returned to operation. You must decide whether it is a better investment to build or buy.
You need to estimate the total cost to purchase the existing brewery up and get it up and running. The owner is asking $1,000,000 for the brewery. You want to increase the production capacity of the brewery by 500 barrels/month which will require another five fermentation tanks. The fermentation tanks cost $10,000 each. In addition to the cost of the fermentation tanks, the company that installs them says they only work on a time and materials contract basis and that their last job was half the size and cost $150,000. Since then, their costs have increased 20%.
What is the best estimate of how much it will cost to purchase and upgrade the existing brewery?
The land you are planning to buy for the brewery is for sale for $100,000. You are planning on contracting out the parts of the job yourself. From the various specialties, you receive the following cost ranges:
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Specialty
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Optimistic Cost
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Most Likely Cost
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Pessimistic Cost
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Site Preparation & Foundation
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$15000
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22500
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31000
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Structure
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400000
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525000
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600000
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Utilities
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30000
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37000
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40000
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Equipment Install
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150000
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200000
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275000
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Finishing
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50000
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70000
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100000
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Using three-point estimation, determine the cost estimate to build the brewery.
Part 3- Estimate Build Schedule
The activities in the build schedule will occur in the following sequence:
What is the estimated duration of the project? Are all of the activities on the critical path?
You are conducting the first Risk Management meeting with the major stakeholders. What are five risks you could identify with this project and their components for inclusion on the Risk Register?
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Risk Statement
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Probability of Occurrence
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Risk Impact
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What Risk Parameters would you use to qualify the probability and impact?
Next, you conduct a Risk-Ranging session and run a Monte Carlo analysis on the results. Given the following distribution from the Monte Carlo analysis, what will your budget and contingency reserve be? Use the data and graph below to guide your response.
Part 5- Analyze using NPV
Assume that building a new brewery will cost $1.4 million in upfront investment and cost $200,000 per year to operate. The estimated annual income will be $300,000 per year. The hurdle rate is based on the balance you are currently earning on your investment account, 10%.
What is the NPV of the first five years of the build option?
Assume that buying the brewery will cost $1.1 million in upfront investment and cost $250,000 per year to operate. The estimated annual income will be $300,000 per year. The hurdle rate is based on the balance you are currently earning on your investment account, 10%.
What is the NPV of the first five years of the buy option? Which option should you choose?
Assume that building a new brewery will cost $1.4 million in upfront investment and net income after taxes will be $100k per year. The hurdle rate is based on the balance you are currently earning on your investment account, 10%. The brewery will also depreciate at $100,000/year over this period.
What is the EVA of the first five years of the build option?
Assume that buying the brewery will cost $1.1 million in upfront investment and net income after taxes will be $50k per year. The hurdle rate is based on the balance you are currently earning on your investment account, 10%. The brewery will also depreciate at $100,000/year over this period.
What is the EVA of the first five years of the buy option? Which option should you choose?
Part 7 – Choose to build or buy
Based on your findings, which is option is the better investment? Discuss and support.
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