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[SOLVED] Proposal to Build a Pipeline

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Competencies

  • Understand economic terminology and economic definitions pertaining to decisions made by managers.
  • Explain and demonstrate knowledge of concepts including the  supply/demand relationship, price ceilings and floors, and market  surpluses and shortages.
  • Elasticity, consumer choice, utility, productivity, and nature of costs.
  • Demonstrate how economic theory contributes to strategic managerial decision-making.
  • Understand various market structures and impacts upon firms, consumers, and government policies.
  • Calculate profits and profit maximization in order to determine the optimal price and output at which firms should produce.

Course Scenario

Oil Company X is a large oil refinery which has been expanding and  taking on new investment projects. Recently, they have considered  building a pipeline that stretches across the United States, from Canada  to New Orleans.

As a cost analyst at Oil Company X, submit a proposal to the board  of the company critiquing the costs and benefits of building a new oil  pipeline that stands to generate copious amounts of revenue. Include in  your report the following: expected changes to supply and demand, a cost  analysis of the project, the cross-price elasticity of an alternative  energy source, cost curves, the new expected profit-maximizing quantity  and price of oil after completion, a risk assessment evaluating  liabilities from potential environmental damage, and a final  recommendation.

Instructions

Use  the Excel document below to complete the assignment, and submit it to the Drop  Box when finished. Student Excel Spreadsheet

As an economic analyst at your firm, you are being asked to  evaluate this investment opportunity and submit a 5-page proposal as a  Word document.

You must include an explanation of expected changes to supply  and/or demand from economic shocks such as natural disasters and  recessions, as well as the anticipated effect of substitute goods  (alternative energy sources) flooding the oil market. Be sure to include  the expected impact on equilibrium quantity and price in your regional  market from these potential changes.

Another team member in the Cost Analysis Department has compiled  the necessary data in the attached spreadsheet below.The total upfront  cost of this project is $1.72 million in fixed costs. Be sure to include  in your proposal any relevant curves graphed from the data in the  spreadsheet. Your Excel spreadsheet needs to include the following  columns in addition to what has been given to you:

  1. TFC
  2. TVC
  3. ATC
  4. AVC
  5. MC

Assume that your firm will hold market power as a supplier of oil  in your region, due to extensive trade restrictions the government has  agreed to put in place after completion of the pipeline. Define the new  market structure, and give new pricing strategies the firm can use to  maximize profits for this particular market structure.

You will also include graphs to show new expected  profit-maximizing quantity and price of oil after completion. After  determining the profit-maximizing price and quantity, as well as the  corresponding average variable cost, determine the expected total profit  for the 15-year duration the pipeline will be in operation.

Be sure to also include a calculation of the cross-price  elasticity of the alternative energy source and oil. Assume the current  price of oil is $50/gallon of crude oil. If the price increases to the  profit-maximizing price, the quantity demanded of the alternative energy  source increases by 20%. Explain if these goods are complementary  goods, substitute goods, or non-related goods. If there is a  relationship, indicate whether the relationship is weak or strong.  Justify your answer with an explanation based on the elasticity figure.

Assume there is a 10% probability of the pipeline leaking, with an  expected liability of $3.2 billion which will be deducted from total  profit. There is a 90% probability the pipeline will not leak. Determine  the expected return on this investment, as well as the variance.

The firm also has an alternative investment which will yield $1.6  billion over the course of the same 15-year period, with a probability  of 80%, or $1.15 billion with a probability of 20%. Calculate the  expected return, as well as the variance. The risk should be expressed  as the standard deviation.

Perform a marginal analysis to determine if the firm should build  the pipeline, considering currently available investments and  opportunity costs.

Format your proposal to include a title page, introduction,  conclusion, and references. Include all relevant graphs, equations, and  calculations. Show your work on calculations to ensure you receive  partial credit for incorrect answers. No credit will be given if your  work is not shown. Remember to cite your sources using correct APA  format, and also use correct grammar, spelling, and formatting.

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