2009/2010 Stage 2 Problem Statement - SME

2009-2010 SME/NSSGA Student Design Competition
4. Economic Outlook
One year ago, the outlook for the economy was bleak, showing no signs of recovery. However,
recently, economic growth has begun and there are signs of a strong recovery. The board of
directors is more optimistic than ever about the future and especially the market potential that
exists around the Bev Quarry. Since your previous work in Phase 1, a competitor analysis has
been completed. The analysis used information acquired from county permit data and aerial
photography. A summary of the competitor analysis can be seen in Table 5.
Table 5: Competitor Analysis
Yearly Production Reserves
Producer Site Name (tons) (tons)
SDC Co all 3,000,000 12,000,000
SDC Co (potentially) Bev Quarry 1,500,000 ??
John's Trucking Gertrude Quarry 200,000 10,000,000
Construction Aggregates Co Smithville 3,500,000 31,500,000
Reliable Bob Sampson Quarry 5,000,000 120,000,000
Happiness Mining Baker St. Sand and Gravel 500,000 150,000,000
Bic Construction Green Quarry 500,000 6,000,000
It is apparent that some of the competition in the local market will be running out of reserves in
the near future and the board of directors would like a recommendation as to whether or not the
Bev Quarry should try to capture the additional market demand. If so, complete a production
expansion strategy with financial analysis. If not, describe the reasons. Please assume that the
local market is “at capacity” and that the market demand will remain constant for the foreseeable
future.
The financial constraints are the same as in Phase One--in order for this to be an attractive
investment for the company, an IRR of 17.5% needs to be achieved. The company traditionally
uses a Cost of Capital of 8% and the corporate tax rate is 34%. You can refer to Table 6 for
wage information.
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