system David Ohrvall CASE 613 Windy Island Crack the Case System available now on Amazon.

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1 system FREE CASE Please enjoy this free case from our Crack the Case System Case Library. Visit mbacase.com for more free cases and companion videos. Crack the Case System available now on Amazon. CASE David Ohrvall Founder of MBACASE.com

2 Islanders seem to be blowing a lot of hot air while investors are crunching the numbers. Can you bring the two sides together? Kingston CITY FACTS P PFamous for its yearly cultural festivals, including film, jazz, and art. P PClaims (controversially) to be the birthplace of ice hockey, and is home to the International Hockey Hall of Fame P PThe original capital of Canada P PMotto: Where history and innovation thrive Train Profile Type Region Analysis Industry Number 3 Business Kingston, Ontario Population: 117.2K Currency: Canadian Dollar, CAD ROADMAP 2 Growth Strategy Energy LEVEL 4 &5 Solo Practice with Video Assist Partner Practice Find your videos 2. Set up 3. Listen to question 4. Recap 5. Create your plan 6. Present your plan 7. Stop and study 8. Reinforce minutes 1. Set up 2. Present the case question 3. Recap 4. Create your plan 5. Present your plan 6. Stop and study 7. Reinforce 1

3 Interview Guide Initial Question s, Inc. operates windmill farms across different cities in Canada. They are exploring setting up another wind farm to produce electricity on Wolfe Island (Kingston). The government already operates a good power distribution grid in the form of submarine cable for transmitting power from the island to the mainland. This cable can be used for distributing electricity produced from the windmills. Should they set up a wind farm on Wolfe Island? What will a 15-year NPV look like? Should they move ahead? Case Twist Check out the Crack the Case System videos on mbacase.com or scan the Video 3 QR code on the Post Case Review page to hear an additional challenge. Click or scan QR to see video. Feedback Physical Skills Weak Strong Body Language Verbal Listening Thinking Skills Hypothesis Generation Comfort with Ambiguity Initial Plan & Output Data Gathering Data Analysis Basic Business Intuition Integration 2nd Level Insights Creativity Recommendation Total Score / 39 Intro Facts (Tell the Candidate if Asked) Key Insights (Do Not Tell the Candidate) Mid-case Data (Tell Only at Appropriate Time) Costs: A windmill costs almost $5.5 Million (including turbine cost) to set up and a wind farm would require about windmills. On-going maintenance and taxes would cost 15%. Rent: Land rent to local farmers will be to the tune of $7500 per annum / per turbine. Output: A typical turbine can generate 2300 Kilowatts of energy, or 3,050 hours of electricity per year. 1 megawatt hour (MWh) = 1,000 Kilowatts (kwh). It can be sold to the government grid for 9 cents per kilowatt hour. Discount Factor: Prevalent interest rates can be assumed at 4%. Revenue: A windmill farm costs about $473M to set up after deducting land rent expenses. The farm will be able to generate 603,900 MWh hours of energy per annum, or $54M revenue. Cash Flow: Post admin, maintenance and tax expenses, cash flow will be about $46M. Pay Back Period: With a discount rate of 4%, it will take about 15 years for the windmill farm to recover the $475M set-up cost (assuming constant 4%, revenues and costs). Quick NPV calculation: The candidate need not find the exact number of payback years. Review the extrapolation approach in Step 6 of the Interviewer s Data Guide. Prompt with Tips: Review the Interviewer s Data Guide to fully understand the math flow. It will be important for you to be ready to prompt with tips when the candidate is stuck. Give handout: After hearing the candidate s financial evaluation and asking questions, show the candidate the Handout. Ask whether these issues affect his decision about moving ahead with the wind farm. Discuss: All the potential issues raised by the locals and resistance groups have a valid solution. To succeed, Windy Islands will need to communicate the benefits that the wind farms will generate ($3M annually) and seek affordable solutions to any problems created. Case Flow and Milestones 1 Prep and Review 2 Present Main Question 3 Guide the Analysis 4 Guide Discussion 5 Get Recommendation Read all the notes in the Interviewer Guide. Understand when to ask certain questions and when to give charts, data and clues. Take on a personality (friendly, firm or foe). Present the case question. Candidate will take notes, ask for a minute, form a plan and present it. The candidate must calculate the NPV. Make sure he has all the key elements (like discount rate, energy per turbine, and price per output) to do the math. Give information and handout and follow the Mid-case Data tips. After the candidate reviews the data, give clues to guide the calculations. It takes about 15 years for s, Inc. to recover the set-up cost. Discuss ways to address the community s concerns. A good recommendation here will have 2 parts: The project is financially viable for all stakeholders involved with 15 years to recover the set up cost. Financial benefits to locals in terms of monthly income are also substantial. 2

4 Interviewer s Data Guide Step 1 Calculate the cost of setting up the wind farm Total turbines / windmills: 86 (use low number of range) Cost of each windmill = $5.5M Multiply 86 windmills x $5.5M Total windmill farm cost: $473M Step 2 Consider other costs Land rent per turbine $7,500 Multiply 86 windmills x $7,500 = $645,000 Step 3 Calculate the wind farm energy output and be ready to help explain the metrics Energy per turbine: 2300 Kilowatts Energy per turbine / per year: 2.3 Megawatts Typical electricity per turbine / per year 3050 hours of electricity Multiply 86 windmills x 2.3 MWh = 198 Megawatts Multiply total wind farm MW x electricity per turbine = 603,900 MWH per year Step 4 Calculate the full revenue potential Revenue per kilowatt hour = 9 cents per kwh Translate revenue into $ per MWh = $90 per MWh Multiply total wind output x revenue per MWh = $54,351,000 per year Translate gross revenue into millions for easier NPV calculations = $54.35M Step 5 Calculate net revenue Gross revenue = $54.4M Reduce by 15% due to taxes and maintenance to find net revenue = $46.2M Reduce by $645,000 for land rent to calculate cash flow = $45.6M Step 6 Calculate NPV using a quick estimate method S S Calculate the rough number of years with no discounting by taking $473M (total farm cost) / $45.5M (cash flow) = almost 10 years Rough out sample present values using the discount rate of 4%: $45M in Year 2 has NPV of $43M (45/1.04) $45M in Year 3 has NPV of $41M (45/1.04/1.04) Extrapolating this method, 15 years is a good estimate to recover the full $473M. 3

5 4 Issues & Concerns Several concerns have been cited regarding the use of wind energy: aesthetics, land space, bird kills, and noise. Some people consider wind turbines unattractive, although others find the rotating blades visually appealing. Concern related to agricultural land space seems to have been resolved because once constructed, the wind turbines occupy less than one percent of the space. Bird kills by wind turbine blades are usually small; however, Wolfe Island is in the path of migrating bird species. Therefore bird mortality is one of the key issues of the environmental impact assessment, and must be satisfactorily addressed before regulators will grant approval to construct and operate a wind farm. The new turbines operate quietly enough that noise does not seem to be a problem. The estimated economic benefit, including royalties, taxes, amenities agreement, and operating and maintenance expenses, equates to over $3 million annually for decades to come. HANDOUT

6 Post Case Review Case Insights & Takeaways The project is financially viable for all stakeholders involved. s, Inc. will be able to recover the high set-up costs in approximately 15 years. The issues and opposition is based largely on traditional view of the windmills, but the latest technology and solutions have addressed most of them. s should educate the locals about these facts to improve public perception of the benefits of the project. Math Tips Review the Interviewer s Data Guide. The set-up costs divided by the annual cash flow comes to about 10 years. Instead of calculating the NPV for 15 years, a sample NPV for 2 3 years can help you project the total range of years necessary to pay back the initial investment. Avoid lots of zeroes by picking a scale like M for millions My Takeaways To build skills and improve, you must apply what you learned to future cases. Take a few moments and review the interviewer feedback and jot down some key insights about your performance in the space below. Thinking Skills My top 2 strengths are: My top 2 soft spots are: What to Expect with Cases Like These This is a numbers-intensive case which combines local social issues as well. Be ready to take a purely financial answer and make it more realistic by discussing challenges with the roll-out. To move through the math quickly, learn to make estimates and extrapolations to reach an initial recommendation. You can fine-tune the numbers after you have a rough calculation. Always show your work to help the interviewer interact with you. It s important to keep the discussion going and not be silent for too long. In addition, the interviewer can help you if he understands what you are doing. To address these problems I ll begin to: Click or scan QR to see video. My Performance During the Case Add up your. Total Score: /15 F Form A Plan R Read My Audience A Anchor a Hypothesis M Mine for Answers E End the Case c 3 Structured, clean clean c 3 Good back & forth, caught clues c Solid 3 Solid hunch, pursued clue clue c Specific 3 questions, solid solid analysis c Used 3 Used facts facts and and data, data, connected b 2 Somewhat organized and and logical b 2 Awkward, trouble with b Partial 2 direction b Missed 2 some some questions, some the some the dots dots logical interviewer style a Messy, overlapping ideas a No 1 No hypothesis at at all math all math mistakes b Some 2 Some data, data, mostly understood 1 Messy, overlapping ideas a 1 Interviewer not not interested, a Vague 1 Vague questions, weak weak math, connections math, couldn t follow no no linkages a No 1 No data, data, no no passion, no no connections 5

7 6 Today s date: 2. Be original with your data 1. Zone out your paper 3. Take clean and simple notes My Initial Plan and Output 4. Leave ample room for a structure and additional notes as the case progresses Worksheet

8 7 s, Inc. Canada Wolfe Island Kingston, Can. Grid submarine cable island to mainland Need: Cash flow Discount rate 15 years Wattage from windmill # of windmills Land rental? Do farmers share profits? Click or scan QR to see video. Potential Plan and Output Wolfe island fit typical criteria? Meet financial threshold? Why Financial Legal / Public Practical What are their financial targets? Is this the best shortterm target? 15 Year NPV? Make investment? 15 year > than initial investment? What variables are at risk? 4% - make sense? How many windmills? Rental charges? Windmill production costs? People want these windmills? Additional Study: For more questions to consider, review Section 13: Roadmaps. Typical complaints against windmills? Any legitimate lawsuits in the works? History with other windmill installs? How long to close deal? Suppliers in place to build the turbines? Time from spend to function? What will it take to get it producing? On-going repair and maintenance Worksheet