Proposal to Build a Pipeline

Deliverable 7 - Proposal to Build a Pipeline 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 attached 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.

Grading Rubric

F F C B A

0 1 2 3 4 Not

Submitted No Pass Competence Proficiency Mastery

Not Submitted

Proposal recommendation is included, but does not apply the concept of opportunity cost.

Proposal recommendation is included, and applies the concept of opportunity cost.

Proposal recommendation is included and applies the concept of opportunity cost, using clear examples.

Proposal recommendation is included, applies the concept of opportunity cost, using clear examples and well- defined reasons for proposal recommendation.

Not Submitted

Explanation did not summarize the changes in supply and/or demand curves, or anticipated curve shifts were incorrect.

Explanation summarized the anticipated changes in supply and/or demand curves correctly, but did not adequately explain changes in equilibrium price and quantity.

Explanation summarized the anticipated changes in supply and/or demand curves correctly, adequately explained changes in equilibrium price and quantity, and used clear examples of each.

Explanation summarized the anticipated changes in supply and/or demand curves correctly, adequately explained changes in equilibrium price and quantity, used clear examples of each, and included well-

defined reasons for proposal recommendation.

Not Submitted

Calculation of some costs included, or contained major errors.

Calculation of all costs included, and contained minor errors, or no relevant curves are graphed.

Calculation of all costs are correct but had minor errors with graphing.

Calculation of all costs are correct, and all relevant curves are graphed correctly.

Not Submitted

Calculation of cross-price elasticity is included, but is unclear or incorrect.

Calculation of cross- price elasticity is correct.

Calculation of cross- price elasticity is correct, and a relationship is correctly identified.

Calculation of cross- price elasticity is correct, a relationship is correctly identified, and explanation of strength of the relationship is well- justified.

Not Submitted

Calculations of expected value and variance for both investments are incorrect with major errors.

Calculations of expected value and variance for both investments contain minor errors, but the overall risk is not quantified.

Calculations of expected value and variance for both investments are correct, but the overall risk is incorrectly quantified or interpreted.

Calculations of expected value and variance for both investments are correct, and risk is correctly quantified and interpreted.

Not Submitted

Explanation of anticipated market is incorrect, or recommendations for new pricing strategy are not included.

Explanation of anticipated market is correct, and recommendations for new pricing strategy are included.

Explanation of anticipated market is correct, and recommendations for new pricing strategy are included, using clear examples.

Explanation of anticipated market is correct, and recommendations for new pricing strategy included, using clear examples and well- defined reasons for proposal recommendation.

Not Submitted

Profit/loss and profit-maximizing price and quantity are included, but with major errors.

Profit/loss and profit- maximizing price and quantity are included, but with minor errors.

Profit/loss and profit- maximizing price and quantity are correct and clearly presented.

Profit/loss and profit- maximizing price and quantity are correct, clearly presented, and accurately depicted graphically.