the questions very carefully because the requirements for

Northern Virginia Community College

Assignment for Course:
Submitted to:
Submitted by:
Date of Submission

Finance 215 – Financial Management
Mark DAntonio
(Name of Group goes here)
MM/DD/YYYY

Title of Assignment
FIN 215 Case Study (Updated 15 May 2011)
Instructions: Read the questions very carefully because the requirements for each are
specific. Each group should turn in one copy of this WORD document (email to me) with
the names of the participating group members typed on the bottom of this cover page.
Answer all questions fully on this document only. That is, I want to see the question
below followed by your answer so I do not have to guess what you are answering. This
project is worth 100 points.
CERTIFICATION OF AUTHORSHIP: I certify that the group named above equally
contributed to the assignment that is attached. Any assistance received in its
preparation is fully acknowledged and disclosed in the paper. Any sources from which
the group used data, ideas or words, either quoted directly or paraphrased is also
disclosed. Please print and sign below.
Student's Signature: ____/Marissa Esguerra/__________________
Student's Signature: ______________________________________
Student's Signature: ______________________________________
Student's Signature: ______________________________________
Student's Signature: ______________________________________
Student's Signature: ______________________________________
Student's Signature: ______________________________________
Student's Signature: ______________________________________

IS GLOBAL WARMING AN OPPORTUNITY OR TRAP?
FIN 215 – Case Study

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Mark D. DAntonio, D.B.A. & Douglas J. Boe
Northern Virginia Community College
WOODBRIDGE, VA USA 22191
Abstract
Students will get an understanding of how the uncertainty of the business environment
changes decisions and leads to Capital Budgeting decisions. The Case tracks the story
of Gulf Electric Inc., a mid-sized electrical manufacturing firm, producing parts for utility
firms and electrical products for retailers. Hurricane Katrina caused a paradigm shift for
individuals and businesses. Many Post-Katrina firms were devastated but some found a
golden opportunity. The case deals with how Gulf Electric might handle the business
environment they encountered after the storm. It deals with how Gulf Inc. dealt with a
capital budgeting project to ramp up production of home generators, pumps and other
equipment.

KEYWORDS: Capital Budgeting, Net Present Value, Sunk Costs, Sensitivity analysis,
Breakeven point, Global Warming, Katrina, Business Strategy

ETHICAL AND CORPORATE LOYALTY CONSIDERATIONS: CASE STUDY SCENARIO CASE
OBJECTIVES
The purpose of this case is to construct a model of the decision process in a firm and how
opportunities can be exploited. The case presents an analysis of cash flows and a sensitivity analysis of
alternatives. Basically the case is very relevant because manufacturers today often face build or buy
choices.
The teaching objectives are:
The evaluation of opportunity in the business environment
The calculation of the breakeven point
The calculation of a sensitivity analysis
The effects of the green movement and global warming on consumer sentiment
The multidimensional decision making process involved in capital budgeting
The use of Net present value as a tool to evaluate projects
The case can be used for Accounting, Strategy and Finance applications. Case questions are
divided into different groups following the case with multiple uses in mind.

CASE FRAMEWORK
Following Katrina, the devastating storm on the Gulf coast of the United States in 2001, many firms
were caught unprepared. This case highlights how organizations may benefit from analysis and planning.
The case introduces and discusses the dilemma that a firm faces when demand is unpredictable.
THE SCENARIO

FIN 215 – Case Study

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Gulf Electric Inc. (GEI) is an established mid-sized electrical manufacturing firm that supplies electric
utility products, parts and equipment in the southeastern United States. GEI’s business had been
stagnant in the last five years due to good weather and recent competition in the industry. The firm had
traditionally supplied electric utilities in the southeast with all types of electrical equipment through longterm contracts. Thus the demand and the revenue stream were steady over a number of decades. The
electric companies had performed maintenance and upgraded lines on a steady and predictable basis. In
recent years foreign firms had taken steadily taken market share from GEI due to lower raw material and
labor costs. GEI found itself in a position where it was losing its traditional market and had little ability to
fight back. As a result GEI leadership met to discuss a number of proposals that looked promising. In
order to smooth their revenue stream and diversify their business GEI expanded into the higher margin
business of consumer products.
PRODUCT DIVERSIFICATION
Due to the ingenuity of its research and development team GEI had a few patents that gave it a core
advantage over the foreign competition. The patented technology allowed GEI to build a line of gasoline
and diesel powered electrical generators with smooth power flow. Marcia Gonzalez, the Vice president of
Marketing at GEI promoted these items as being safer for consumer products. She labeled the full line
GEI products as “PowrFlo” to point out the smooth transfer and flow of power. GEI was able to offer a
guarantee that “PowrFlo” products would not damage accessories that were plugged in. Marcia
advertised the “PowrFlo” line as being vastly superior for this reason. Since these products virtually
eliminated electrical spikes and they were patent protected GEI was able to overcome the cost
advantages of the foreign competitors. GEI also had the advantage of being first to market with these
newer products that were really in a class by themselves compared to earlier generators. The generators
were introduced in 2004 and they were an instant hit taking much of existing competition by surprise. The
result was a steady sales increase in 2004 and 2005. Even the power companies bought them as a
backup for emergencies. GEI had intended the product line for consumers and they also offered a service
plan for only $100 annually that included a GEI technician testing the unit semiannually and replacing the
fuel filter and adding fuel stabilizer annually. The sales contract was very popular and provided peace of
mind to consumers. Over 80% of new generators were sold with the sales contract. Demand was
increasing about 10% per year on a steady basis. GEI marketing research revealed that 2% of customers
were replacing older generation equipment while 8% were customers that had never owned a generator
before.
GEI also designed special pumps to operate alone or with GEI generators. Like the generators these
pumps were made in many sizes and came in 110 volt and 220 volt versions. To make them more flexible
they were designed to run on direct current from batteries as well as alternating current.
GEI THE GREEN COMPANY
GEI also created the option of running the pumps on batteries charged by solar cells mounted on
rooftops. The entire line of green products was called “SunnyFlo” and they were promoted heavily by GEI
as an alternative to traditional operation. They were practical due to the lack of electricity in some areas
such as places were generators could not be placed for safety reasons. They also appealed to the public
because of their environmentally friendliness.
An additional feature of the GEI generators was the low emissions that they produced. All GEI
generators came with a small catalytic converter integrated into the exhaust system of the generator. The
GEI patented technology was capable of emission reductions of 90% over conventional and competing
generator models. Because these generators were designed with a patented cylinder head design GEI’s
competitors could not easily duplicate their environmental performance. These generators were also
marketed with the environmentally friendly “SunnyFlo” label.

HURRICANE KATRINA

FIN 215 – Case Study

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In August of 2005 one of the strongest hurricanes on record struck the gulf coast of the south east
United States. Hurricane Katrina caused more than 1800 deaths and caused over 80 billion dollars in
property damage. All of the areas hit by the storm lost all electrical power as well as many locations
nearby that were not hit by the storm.
DEMAND GOES WILD
After the storm the entire Southeastern United States was in a panic. The news showed many
pictures of the devastation along coastlines and the wrecked homes and businesses. Most reports
focused on the damage in New Orleans and showed how the dramatic failure of the levy system led to
widespread misery. Almost immediately, after the storm, demand for GEI generators exploded.
First there was great demand for generators in the storm areas. However, after a few days of
incredible television coverage orders began to come in from areas in the Gulf and Atlantic regions in the
Southeastern United States in record numbers. It seemed that word of the product had been well received
and that Katrina had served as a lightning rod for consumers. Paradoxically, the storm that had caused so
much misery and destruction for individuals and businesses, was a tremendous opportunity for GEI. The
question was if the company could move quickly enough and in the right direction tactically and
strategically to capitalize on the opportunity.
THE MEETING
Doug Smith, CEO of Gulf Electric immediately called a senior staff meeting. Doug was looking for
solutions and he needed some quick answers. Obviously GEI had to come up with some additional
capacity to meet what seemed to be rapid and permanent demand. This was a problem GEI had before
Katrina due to the success of the “PowrFlo” and “SunyFlo” products. However, Katrina had given the
entire product line a new measure of urgency. The senior staff meeting that the CEO called included the
Vice president of Marketing Marcia Gonzalez, the Vice president of Human Resources Amy Johnson, the
CFO Alan Wills and the COO Frank Criss with his Chief Engineer John Amer.

CEO
Doug Smith

VP Marketing
Marcia Gonzalez

COO
Frank Criss

CFO
Alan Wills

VP Human
Resources
Amy Johnson

Chief Engineer
John Amer

Doug summarized the issue at hand regarding product capacity. Marcia had been proclaiming that
the demand for the various product lines was a permanent trend. In past meetings Alan had resisted
many of Marcia’s ideas in favor of large capital budgeting efforts arguing for outsourcing instead. Amy
Johnson, who was familiar with costs of recruiting, training and maintaining a work force supported Alan.
Amy feared that changes in demand might cause GEI to have too many employees that it could not easily
shed in the event of downward demand shifts. This point seemed moot under the current circumstances.

FIN 215 – Case Study

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It was clear that Katrina was a paradigm shift from business as usual. Alan and Amy conceded the need
for additional capacity and new thinking on the subject.
Now that all parties seemed ready to discuss the capacity issue Doug asked what process to follow.
Alan was still worried about funding and the risk of a large expansion and asked Doug to move cautiously.
Doug decided to engage in a Break-even sensitivity analysis before proceeding with any large capital
budgeting projections. This seemed to ease the tension for Alan and Amy and so Doug asked Marcia to
project demand for one product. The best selling generator (the PowrFlo 500) was chosen to use as a
model for the sensitivity analysis. Frank and John would come up with cost estimates for production under
several scenarios. Amy would investigate the implications of staffing and Alan would compile the
information and present it at the staff meeting next week.
THE SENSITIVITY ANALYSIS
Doug Smith reported to the main GEI conference room for the next weeks meeting. He was happy to
see everyone already there. Alan provided Doug with a list of options that had been discussed during the
week. There were three options discussed and they are shown in Figure 1.
Breakeven Sensitivity analysis for the PowrFlo 500
Option
Fixed cost
Variable cost (per unit)
#1 – Completely new modern factory
$4,000,000.0
$55.00
0
#2 - Outsource production
$ 0.00
$255.00
#3 - Expansion of the existing GEI facility
$1,250,000.0
$155.00
0
Figure 1. Analysis of manufacturing options
Although the cost of the new facility was staggering and both Alan and Doug were concerned
about it they realized that with enough demand for the product the new factory would be the way to go.
Doug looked at the breakeven charts that Allan had provided and he could clearly see the sales numbers
that were needed to justify the new facility. The only question now was if such demand could materialize
to justify the expense.
MARCIA’S REPORT ON DEMAND, SOCIAL RESPONSIBILITY AND COMPETITIVE ADVANTAGE
Marcia Gonzales then spoke to the group. She made the case that the GEI strategy of emphasizing
smooth power flow with the “PowrFlo” technology and environmental responsibility with the “SunnyFlo”
technology has led to a competitive advantage for GEI. Marcia further stated that the recent public
outrage over the State, Local and Federal government responses to the storm may also be important to
the firm. Marcia, stated that GEI made products that were uniquely important to this disaster. While most
individuals and businesses were suffering as a result of the storm GEI had benefited. The government
was scrambling for a manner to appease the public and act on behalf of its’ constituencies. She made the
point that the government should give businesses and homeowner tax breaks to install power generation
equipment. Several local politicians in the Southeastern United States had already made noise about
such legislation. The fact that the GEI equipment was so environmentally friendly would give a
tremendous competitive advantage to the firm. In addition GEI could donate some equipment to certain
impoverished areas and to Churches, VFWs and the like. This was a socially responsible policy and it
would also contribute to the good name of the firm and it would get GEI’s products out in the public eye.
Marcia then showed the projected demand figure that she had compiled based on her new sales
forecasting software, focus groups and consumer polling. The new monthly numbers were no less than
stunning. The old sales estimate showed a 1% monthly increase in the estimated sales. The post-Katrina
numbers were much higher and increasing at 2%. Refer to Figure 2.

FIN 215 – Case Study

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Old Sales Estimate

New Sales Estimate

FIN 215 – Case Study

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Date

for PowrFlo 500 (units)

for PowrFlo 500 (units)

Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08

350
354
357
361
364
368
372
375
379
383
387
390
394
398
402
406
410
415
419
423
427
431
436
440
444
449
453
458
462
467
472
476
481
486
491
496
501
506
511

2700
2754
2809
2865
2923
2981
3041
3101
3163
3227
3291
3357
3424
3493
3563
3634
3707
3781
3856
3933
4012
4092
4174
4258
4343
4430
4518
4609
4701
4795
4891
4988
5088
5190
5294
5400
5508
5618
5730

Figure 2. GEI Pro Forma marketing sales projection estimates before and after Katrina
Marcia’s projections for demand had outstripped all expectations for all products. The breakeven
sensitivity analysis provided by Alan showed production numbers for the three options discussed that
were easily eclipsed by Marcia’s projections.
DOUG’s CALL

FIN 215 – Case Study

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Marcia’s numbers really showed the team that new options needed to be considered with more
aggressive production goals. Doug realized that expansion of the current facilities just would not do. Doug
reasoned that this was a classic make or build situation. Doug thanked everyone in the meeting as they
left the conference room. Doug stopped Alan for a moment and asked Alan how GEI could finance such a
large project. Alan said he would think about it.
CASH FLOW
Alan evaluated the sales figures prepared by Marcia and the marketing staff. He then used the sales
price of the PowrFlo 500 to develop a statement of Pro Forma cash flows. Many folks would get very
excited by the large gross margin that was apparent in the figures. However, being the CFO, Alan knew
he had to calculate a present value (PV) of these future cash flows in order to get a number that could be
used by Doug and the rest of senior management to make such a large capital budgeting decision.
Specifically Alan would have to discount the monthly cash flows shown in Figure 3.

Date

Old Sales Estimate
for PowrFlo 500 (units)

Cash Flow with average
sales price of $499.00

Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08

350
354
357
361
364
368
372
375
379
383
387
390
394
398
402
406
410
415
419
423
427
431
436
440
444
449
453
458
462
467
472
476
481

$174,650.00
$176,396.50
$178,160.47
$179,942.07
$181,741.49
$183,558.91
$185,394.49
$187,248.44
$189,120.92
$191,012.13
$192,922.25
$194,851.48
$196,799.99
$198,767.99
$200,755.67
$202,763.23
$204,790.86
$206,838.77
$208,907.16
$210,996.23
$213,106.19
$215,237.25
$217,389.62
$219,563.52
$221,759.16
$223,976.75
$226,216.52
$228,478.68
$230,763.47
$233,071.10
$235,401.81
$237,755.83
$240,133.39

FIN 215 – Case Study

New Sales Estimate Cash Flow with average
for PowrFlo 500 (units) sales price of $499.00
2700
2754
2809
2865
2923
2981
3041
3101
3163
3227
3291
3357
3424
3493
3563
3634
3707
3781
3856
3933
4012
4092
4174
4258
4343
4430
4518
4609
4701
4795
4891
4988
5088

$1,347,300.00
$1,374,246.00
$1,401,730.92
$1,429,765.54
$1,458,360.85
$1,487,528.07
$1,517,278.63
$1,547,624.20
$1,578,576.68
$1,610,148.22
$1,642,351.18
$1,675,198.21
$1,708,702.17
$1,742,876.21
$1,777,733.74
$1,813,288.41
$1,849,554.18
$1,886,545.26
$1,924,276.17
$1,962,761.69
$2,002,016.93
$2,042,057.27
$2,082,898.41
$2,124,556.38
$2,167,047.51
$2,210,388.46
$2,254,596.23
$2,299,688.15
$2,345,681.91
$2,392,595.55
$2,440,447.46
$2,489,256.41
$2,539,041.54

8

Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08

486
491
496
501
506
511

$242,534.72
$244,960.07
$247,409.67
$249,883.77
$252,382.61
$254,906.43

5190
5294
5400
5508
5618
5730

$2,589,822.37
$2,641,618.82
$2,694,451.19
$2,748,340.22
$2,803,307.02
$2,859,373.16

Figure 3. Pro Forma analysis of cash flows based on estimated sales figures before and after Katrina
FINANCING
Alan had a lot to consider on a number of matters before he could even think of proposing possible
options to the senior staff regarding finances. His mind was reeling. The news was just too good, it looked
like a factory might need to be built. Alan evaluated the current debt of the firm. Although millions of
dollars would need to be generated and equity offering (stock sale) was out of the question. Alan knew
that the shareholders would never approve a dilution of their interest and they did not have the funds to
invest for a project this large. The financing for the new factory would have to come from debt. This
worried Alan greatly.
THE BREAKEVEN POINT
Alan also had to prepare a breakeven point (BEP) for the top management of the firm. One thing they
were sure to investigate was how quickly their investment would be recovered. Alan would use the
following formula to determine the BEP for the PowrFlo 500 project:
BEP = Fixed Cost / (average sales price – marginal costs).
Alan sure had his work cut out for himself. He wondered just which option would be best for the firm. He
also wondered how the firm would finance the more expensive options. It was time to crunch the
numbers. Alan closed his office door and opened his laptop. It would be a long evening.
CONCLUDING COMMENTS
Making decisions under conditions of risk and by using leverage is difficult. Competitive forces would
also have an effect on the decision. The proper course of action for a firm in such a situation is based on
a number of considerations. This case can be used to help students to identify options before a final
decision of action is made.

INSTRUCTIONS FOR ACCOUNTING AND FINANCE STUDENTS
After breaking into two or more groups complete the following (additional research is needed).

FIN 215 – Case Study

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1) As a Group: Using Table 1 in the case duplicate the sensitivity analysis of the production points for
the three options considered in the case by management: 1) Build an entire new production facility
that would enable GEI to produce all of the products it needed, 2) Outsource production to build
partners, 3) Expand the existing GEI facility to increase production. Construct these in a spreadsheet
resembling the following (start with 100 units and increment the units upward by 100 units until you
have calculated it to 30,000 units:

Fixed costs
Variable cost

Units
100
200
…
…
…
…
…
30000

Option 1
New location
$4,000,000.0
0
$55.00

Option 2
Subcontract

Option 3
Expand

$0.00
$255.00

$1,250,000.00
$155.00

Total costs per proposal – fixed and variable
Plan A
Plan B
Plan C
New location Subcontract
Expand
Calculate this Calculate this
Calculate this

2) As a group: Review the spreadsheet created above as a group and identify the production points
where each option is attractive. Draw a chart (by hand or with spreadsheet software) showing the
total cost lines of the three options. Plot total cost on the Y-axis and units of production on the X-axis
for the three options. Identify the option that makes the most financial sense for the firm for 12,000,
13,000 and 28,000 units.
Net Present Value
3) As a group: Review Figure 3 that shows the cash flows estimated before and after Katrina. Calculate
the NPV of cash flows for each stream of cash before and after Katrina using a discount rate of 9%.
Remember that Figure 3 uses monthly cash flows and the discount rate is an annual rate. Use the
following format (only part of Figure 3 is shown below).

Date

Old Sales Estimate
for PowrFlo 500 (units)

Old NPV of cash flow
sales price of $499.00

Oct-05

350

$174,650

New Sales Estimate
New NPV of cash flow
for PowrFlo 500 (units) sales price of $499.00
2700

$1,347,300

Break Even Point

FIN 215 – Case Study

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4) As a group: Use the fixed costs (Figure 1), the marginal cost per unit (Figure 1) and the average
revenue per unit ($499.00) to calculate a Breakeven point in units for each of the methods (expand,
outsource, new plant) in Figure 1.

Other opportunities
5) As a Group: How might the service plan to maintain generators be used by GEI to provide a
future revenue stream?

FIN 215 – Case Study

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