Xco produces and sells a special type of organic oil sold by the barrel. For many years, they have sold through a Jersey-based importer. Their contract with the importer is up for renewal in six months andXcohas decided to look at options other than the Jersey company.
Option 1: Sell through the current importer. Let the importer handle everything.Xco Industries receives a net payment of $7 USD per barrel.
Option 2: License production to Global Industries , who will also manage marketing and distribution of the oil. Global Industries will charge Xco a fixed fee of $5 million USD to cover marketing costs. Global will also pay Xco $10 USD per gallon of Xco products it sells in Asia.
Option 3: Create a new enterprise,Xco Asia, by purchasing a functional refining plant for $15 million USD. Annual fixed costs are estimated to be $5 million USD and variable costs are $60 per barrel. Sales price will be $100 USD per barrel.
Option 4: Hire a consulting firm, Stacy Decision Systems, for $500,000 to do a study of the market. They will take six months to do their study. They discover there is a 10 percent chance that an alternative can be found to the first three options. They spend another year studying the problem for $1,000,000. During this time, option 1 continues. At the end of the year, they may find an alternative that pays Xco $7.50 USD per barrel. Or, they might not.
USD—United States Dollar
Develop a five-year forecast for each of the options. Assume there is no inflation and do a pre-tax analysis. Develop a cash flow forecast assuming sales remain constant at somewhere between 800,000 barrels and 950,000 barrels. Make and support a recommendation as to which of the options to employ.
barrels per year, 800-950K.