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
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
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®
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)
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.
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.
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.
|
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.
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
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.
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
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)
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.
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.