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THE AMERICAN UNIVERSITY  IN CAIRO
Engineering Department
ENGR 345:Engineering Economy
 

Term Project
Hold/Sell Decision
Bill Harbert International Construction, INC.

Presented to:
Dr. Nahed Sobhi Mohamed

Presented by:
     Moataz Mohammad Attallah
     Omar Sherif El-Haggan
     Maher Hafez Amer
     Tamer Aboul-Seoud
     Sayed Sadek

Fall 1998


Contents
 
Topic
1-Abstract

2-Introduction
 ·  Company Profile
 ·  Origin of the problem 
 ·  Problem Solving

3-Engineering Economy Concepts
 ·  Interest Rates
 ·  MARR estimation
 ·  Present Worth Comparison
 ·  Annual Worth Comparison

4-Background
 ·  Custom duties (tariff)
 ·  Free trade zones
 ·  Custom exemption

5-Calculations and Decision Making
 ·  Tabled Raw Data Appendix
 ·  Excel Spreadsheet Appendix
 ·  Description of the procedure
 ·  Data Analysis and justification
 ·  Discussion

6-Conclusion


I-Abstract:

The aim of this report is to introduce a real  economic study entitled Sell/Hold Decision. The report is based on a real economic case study that was carried out by the administration of Bill Harbert International Construction, INC-Egypt. The report gives a detailed explanation for one of the common economic cases, which is liquidation. In addition, it introduces set of comparison methods that were used in order to take the Sell/Hold decision, especially present and annual worth comparison methods.
The report highlights some economic definitions that were used in the study, such as: free zones, and custom duties (tariffs).  Moreover, it focuses on the requirements of custom exemption in Egypt.
The report utilizes from the computer program MS Excel® in using the spreadsheets. The raw data, calculations, and final conclusion and justification are tabled and discussed in the conclusion.

Key Words:  Sell/Hold Decision-Bill Harbert International Construction INC-Egypt, liquidation, custom duties, return rate comparison methods, MS Excel®
  



II-Introduction:

A)Company Profile:

Bill Harbert International (Mother company, Alabama: US)

Bill Harbert International Construction, Inc. is a privately held construction  company headquartered in Birmingham, Alabama.  The development of Bill Harbert International's current business began in 1949 when Bill joined his brother John in the formation of Harbert   Construction Corporation. Over a span of 48 years, construction capabilities evolved from highways and bridges to water, sewer, and natural gas   distribution systems. In the latter years, construction capabilities of airfield        facilities, marine ports, military bases and commercial/industrial buildings   were added.
  When Harbert Corporation decided to get out of the construction business ,   Bill L. Harbert founded Bill Harbert International to continue the work he had  entered with his brother in 1949.
  Today, Bill Harbert International operates throughout the world delivering   high quality at a low price.  Bill Harbert International believes that versatility and the ability to quickly     mobilize both personnel and equipment are key elements to the success of  the company's performance. Our unyielding commitment to excellence will carry us into the 21st century as a leader in both the domestic and international construction markets. But above all, is our commitment to serve   the people of the world in their hopes to build a better community and a better way of life.
(Excerpted from the Internet Web Site http://www.b-harbert.com)



Bill Harbert International Construction-Egypt

For 16 years, B.H. has gained great experience in the civil work which gave it the opportunity to get many projects in different parts in Egypt some of which were in Embaba, Lagoon, Safaga’s, Al-Haram, and Alexandria. The experience of this company includes projects in water treatment plants, wastewater treatment facilities, pumping stations, water/sewer lines, airfield facilities, oil and gas pipelines, hotels, office buildings, and many other fields.
Projects have been limited to wastewater and water treatment projects as it is necessary because of the lack of underground sewage design where many buildings and projects were built in the last few years without planning or designing. This is a result of the enormous number of people who live in the crowded cities and build their houses without planning. It is now the responsibility of the government to redesign and rebuild trying to save what can be saved. It has never been the case that the company has not fulfilled a contract commitment. Each project, though, was different from the other. For example, Safaga’s project that cost 78 million US$ was an industrial project to build 4 major buildings. Whereas in another project like in Rod El Farag, the project was different as it was for waste water and water treatment that cost 198 million US$.
 Egypt branch had many projects. However, not all of them were under the same management. This change of managers resulted in having different experiences.  This was easy having all this worldwide branches where a manger can work in wastewater projects one day and the other day he is on a oil refinery in the middle of the sea.   Still the crew has nearly been the same in the branch of Egypt for  the last 16 years and only the manager is changed according to the mission or the project.



B)Origin of the Problem

Bill Harbert company has been working in Egypt since the time the American fund, supplied by Agency for International Development (AID), started to flow to Egypt (late seventies until now). The company has been successful in constructing major construction projects. It was assigned by the US AID program to construct major projects.
However, the company’s branch in Egypt was forced lately to liquidate itself, and leave the country for good to any of company branches in the neighboring countries, such as: Israel, Turkey, etc… This is a direct reaction for the expectations that the US AID to Egypt is going to decrease step by step, which is a directed followed by the current American Government. This decision was taken mainly due to some political reasons, and maybe economic. All the international economic journals believe that the Egypt economy has already started its booming. Thus, the American government should stop pumping funds into Egypt.
Since the company has been working for around 16 years in Egypt, they had to purchase their own equipment instead of leasing equipment. These equipment are construction machines, that are used in many different applications. One could imagine that these machines are really big machines, and expensive as well. As previously mentioned, the company experience includes a group of major projects, such as: water stations, sewage stations and buildings. These machines are cranes, trucks, bulldozers, winches, cars and other construction machines.



C)Problem Solving

Since the company is determined to leave Egypt, the decision that was taken was to liquidate the company. This decision was followed by another decision making process, whose economic professional term is called (Sell/Hold) decision. The company has two alternatives.
 
Point of Comparison Proposal (A) (Sell) Proposal (B) (Hold) 
Explanation Sell the equipment in Egypt  Ship the equipment to a neighboring country. 
Points to consider To sell the equipment in Egypt, the company has to pay the custom duties. They were exempted from custom duties since they were working on public projects.   To ship the machines to another country, the company has to pay the shipping costs.  
 
     

     Positive  Liquidation is required in both cases

Since the company was working under the US AID, they were able to enter their equipment to Egypt without paying the custom duties. However, if the company decided to sell these equipment in Egypt, they have to pay the customs. Therefore, the company high board reached to the decision that it is either to hold or sell the equipment.
In this report, we will be making the same decision making process that was carried out by the Financial department of the company in Alabama, which is either to sell or to hold the equipment.
   



III-Engineering Economy Concepts:

Hint: In our analysis, we will be using the annual and present worth comparison methods. We will be dealing with annual maintenance costs, shipping costs, custom duties, purchasing price and selling price.

 ·  Liquidation: Transformation of the capital, investment and assets into cash.

 ·  Interest Rate Definition:
When a company invests a certain capital (P) in a project, it will receive a certain sum (F) after a certain number of years (n). The difference between the future sum (F) and the present sum is usually called the profit or the interest.
Most of the economy terms prefer to represent interests in a percent representation in order to give a solid meaning for it.
 
Interest rate is sometimes referred to as rate of return (ROR). However, ROR term is used when estimating the profitability of a proposed alternative or when evaluating the results of a completed project or investment.

 ·  MARR (Minimum Attractive Return Rate):
 The MARR refers to the minimum interest rate that is required by a certain project in order to be considered as an investment. The actual interest rate or the ROR of a certain project must exceed the MARR in order to be considered profitable. The MARR is the minimum interest rate of a certain project. If the interest rate of a certain project equals the MARR, this means that the revenues cover the capital and the expenses over the project life. Thus any project must have a ROR that exceeds the MARR in order to be considered by a certain company.

 ·  Present Worth Comparison:
 Present Worth (PW), present value (PV), or net present value (NPV) are all names for calculations of all the amounts that exist on a cash flow diagram in a present worth amount. The present worth method is used to compare between common life projects and decide which gives out maximum profit.
 Present worth calculations of comparisons implies the conversion of annual payments (A), and capital costs (P), future values (F), and gradient values if any, into present values. This is done using the following conversion factors:
 ·  (P/A,I,n): èSeries Present Worth Factor
 ·  (P/F,I,n): è Present Worth Factor
 ·  (P/A,I,n)X(A/G,I,n)èGradient Present worth Factor (product of two factors)
 The only shortcoming of the present worth method of comparison is that we can not compare projects of different lives. This is because the present worth is dependent on the number of years. Sometimes we can overcome this disadvantage by making a present worth comparison using the LCM (Lowest Common Multiple) of the number of years between the different alternatives. Otherwise, we can use a certain study period in order to asses the project. However, using the study period implies some complicated processes, such as: salvage value calculation and depreciation.

 ·  Annual Worth Comparison:
 The Annual worth method of comparison represents an easier method of comparison. This is because it transforms are the amounts on the cash flow diagram into annual payments. Hence, it allows us to decide which of the alternatives reflects an attractive on in comparison to the other. It is easier to use, and it can be used to evaluate alternatives with different lives.
 The method implies the conversion of capital costs (P), annual payments (A), future values (F), and gradients into annual worth, using the following factors:
 ·   (A/P,I,n): èCapital Recovery Factor
 ·  (A/F,I,n): è Sinking Fund Factor
 ·  (A/G,I,n)èGradient Annual worth Factor
  



IV-Background:

CUSTOM DUTIES:
 ·  Tariff:  tax levied by a government on imports and exports. The money collected from tariffs is called a customs duty.
 ·  Tariffs are used to protect domestic manufacturing and agricultural industries from competition with foreign and imported commodities by levying the tariffs, so making the price of imported goods more expensive. The aim was to have a better bias in the direction of exporting rather than importing goods.
 ·  After World War II, tariff barriers continued to decrease with the establishment of the General Agreement on Tariffs and Trade (GATT) and the European Community (now called the European Union). These groups lowered tariffs among themselves and maintained a common tariff for nonmembers. World trade promotion through lower international tariffs and the removal of other obstacles continues to be fostered by the World Trade Organization (WTO), which took over GATT's activities in 1995. Most trading nations are members of WTO.

FREE-TRADE ZONES:

 ·  Free Trade:  interchange of commodities across political frontiers without restrictions such as tariffs, quotas, or foreign exchange controls. This economic policy contrasts with protectionist policies that use such restrictions to protect or stimulate domestic industries. Some countries follow these policies because of the country being rich (such as: UAE (United Arab Emirates)), and others follow it by signing certain agreement for free trade between a certain group of countries, such as: USA, Canada and Mexico, who signed NAFTA (North American Free Trade Agreement).

CUSTOM EXEMPTION FOR PUBLIC PROJECTS:
The Egyptian Law includes articles that allows the Egyptian and foreign firms to be exempted from customs when they are accomplishing public projects. Thus Bill Harbert was able to enter the machinery to Egypt custom free. However, when they intended to sell it, they have to pay the customs.
This articles applies for public projects, such as: tourism, mega projects (major projects), medical equipment and other commodities.



V-Calculations and Decision Making:

DESCRIPTION OF THE PROCEDURE:
The company has purchase a long list of equipment used to accomplish their projects. Each of these equipment has an initial cost (P) and annual working + maintenance costs (A). The minimum attractive interest rate was estimated by the company to be MARR = 8%. This interest rate is estimated by calculating the net expenses and costs of the company in comparison to the  revenues or the output profit. It was concluded that the company needs a minimum return rate of 8%.

The company now wants to liquidate its capital, because technically speaking they are finishing their activities in Egypt. In doing these process, they have one of two options:

Option #01 (Hold) :
The company can hold the equipment and not to sell it in Egypt. The equipment is shipped to another country that does not apply the customs of Egypt. It can sell the machine there without the paying the customs. However, they have to pay for the shipping costs.
 ·  P: Initial Cost
 ·  A1, A2, A3, A4, A5: Annual costs
 ·  SP: Selling price
 ·  SC: Shipping Cost

 
Option #02: (Sell)
The company can sell the equipment in Egypt. However, in that case they have to pay the customs on the equipment because when they entered these machines to Egypt, they were temporarily exempted from customs.
The machine has been in service for five years. During these five years, they had annual operating and maintenance costs.
 ·  P: Initial Cost
 ·  A1, A2, A3, A4, A5: Annual costs
 ·  S: Selling price
 ·  C: Customs
  

 
Data Analysis and Discussion

In the spread sheet, all the data and information of the machines are collected as follows:
  1 . First column shows the serial number of the machine
  2 . Second column indicates the value at year 0 (1989) which is the purchasing price for the machine. This value is zero for machines which are purchased afterwards
  3 . Next six columns have values at years 1990 to 1995. They show either annual costs of the machines or purchasing price. Zero value means that the machine is not purchased yet; therefore, it has neither purchasing price nor annual cost at this year.
  4 . Then, there are two options, either to hold and sell the machine outside(option 1) or to sell it inside Egypt(option 2). In option 1, there is a shipping cost and a selling price outside Egypt. In this case, the value at year 96 is (selling price-shipping cost). In option 2, there is a customs cost and a selling price inside Egypt. In this case, the value at year 96 is (selling price-customs cost).
  5 . The present worth is calculated at year 89 for the two cases by the equation:
  6 . PW=-V89-V90(P/F,8%,1)-V91(P/F,8%,2)-V92(P/F,8%,3)-V93(P/F,8%,4)-V94(P/F,8%,5)-V95(P/F,8%,6)+V96(P/F,8%,7)
  7 . where V is the value at the indicated year. Values which are negative are purchasing prices and annual costs. Last value is positive because it is: selling-shipping or selling-customs
  8 . After calculating the present value, a comparison is made between the two cases. If the present value of option 1 is higher, we choose decision 1(HOLD) which is shipping the machine and selling it outside Egypt, but if the present value of option 2 is higher, we choose decision 2(SELL) which is keeping the machine and selling it inside Egypt.
  9 . Total number of machines is 48. At the end, it was found that 19 machine were held and sold outside Egypt (option 1), and 29 machine were sold inside Egypt (option 2)
  



Discission and Justification:
Actually one may think after reading the data and the calculation that there was no need to make all the interest rates based comparison, and simple calculate the difference between the outside selling price and the shipping costs, and the difference between the inside selling and the customs. Then comparing these two numbers to each other will give the right answer.
Definitely, this is true. However, there were some important points behind using the interest rates approach and the present worth method:
  1 .  The use of the simple comparison approach might be useful for a speedy check whether option #1 or option #2 is feasible or not.
  2 .  The use of the interest rate was important because the machine itself is not just a selling price, customs, and shipping price. These equipment have usually very high operating costs, and different purchase price as well. Hence, the point behind the use of the interest rate was to make use of the available data of the maintenance and operating costs.
  3 .  It is also clear from another test calculation that even by using the simple comparison method (selling outside minus shipping option versus selling in Egypt minus Customs), the results are the same. This shows that both methods are strictly true since they confirm each other.
  4 .  In addition, while we were getting the data from the country, we noticed the extensive use of MARR in their calculations. In addition, they use interest rates in general to determine the selling price they want for the equipment.
  5 .  In determining the customs costs, they used to multiply the purchasing price with a certain factor.

One more point to highlight that it was possible also to use the annual worth method. However, this will not add anything because it is simply multiplying  the present worth by the factor.



VI-CONCLUSION

In this project, we managed to present a study for Bill Harbert company concerning the liquidation of their company and the decision making process concerning the liquidation of their equipment.
We used some common economic comparison methods. These methods were consistent with another the simple approach followed by the company.



References:
Encyclopaedia Encarta © 1997. Microsoft ™
Blank and Tarquin. Engineering Economy. McGraw-Hill International Editions, 1997.

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