Phil’s Haulage Harvard Case Solution & Analysis

Phil’s Haulage Case Study Solution

Expand Business to Other Site Preparation Services

The second alternative for the company is to expand its business in other site preparation services after getting some expertise in these areas of business which can only be get after making some deep cost and benefit analysis of the expansion.

Expand Business to Topsoil Business Segment

The third option for the company is to expand its business in topsoil market, currently it is only 15 percent of company’s overall revenue. This options contains the huge growth opportunities such as the 5 percent yearly growth which will be increase more in future.

Recommendation:

On the basis of the analysis of all three options that are described above, it has been concluded that the company should expand in excavating market, because it is the related diversification in site preparation process business and the great opportunity for the company which need to be avail immediately otherwise the competitors of the business will grab the opportunity which will create the negative impact on company’s cash flows, revenues and profits.

 

Exhibit 1: SWOT Analysis

Exhibit 2: Ratio Analysis

Ratio Analysis (2012)
Industry AveragePHFav / Unfav
Quick Ratio                          1.97                    1.51Unfav
Current Ratio                          2.31                    1.75Unfav
Days of Accounts Receivable                        65.00                 69.43Unfav
Return on Assets5.3%18%Fav
Net Profit Margin10.9%8%Unfav
Interest Coverage10.3                 12.75Fav
Average Total Assets         3,671,559

Exhibit 3: DCF Valuation of the Excavation Opportunity (Worst Case)

DCF Valuation of the Excavation Opportunity (Worst Case)
 20122013201420152016201720182019202020212022
 012345678910
Initial Investment            2,782,566
Revenues         2,450,000         2,510,025         2,571,521         2,634,523         2,699,069   2,765,196   2,832,943   2,902,350   2,973,458   3,046,308
Cost Savings:
Transportation Costs Savings             111,614             111,614             111,614             111,614             111,614      111,614      111,614      111,614      111,614      111,614
Subcontractor’s Costs Savings             700,000             700,000             700,000             700,000             700,000      700,000      700,000      700,000      700,000      700,000
Additional Expenses:
Operators’ Salaries             201,600             201,600             201,600             201,600             201,600      201,600      201,600      201,600      201,600      201,600
Site Supervisors’ Salaries             540,000             540,000             540,000             540,000             540,000      540,000      540,000      540,000      540,000      540,000
Administrative Assistants Salaries               35,000               35,000               35,000               35,000               35,000         35,000         35,000         35,000         35,000         35,000
Depreciation Expense             278,257             278,257             278,257             278,257             278,257      278,257      278,257      278,257      278,257      278,257
Machinery and Equipment Expenses             612,500             612,500             612,500             612,500             612,500      612,500      612,500      612,500      612,500      612,500
Operating Profit         1,594,258         1,654,283         1,715,778         1,778,781         1,843,326   1,909,454   1,977,201   2,046,608   2,117,716   2,190,565
NOPAT         1,355,119         1,406,140         1,458,412         1,511,964         1,566,827   1,623,036   1,680,621   1,739,617   1,800,058   1,861,981
Add: Depreciation Expense             278,257             278,257             278,257             278,257             278,257      278,257      278,257      278,257      278,257      278,257
Net Cash Flows         (2,782,566)         1,633,376         1,684,397         1,736,668         1,790,220         1,845,084   1,901,292   1,958,877   2,017,873   2,078,315   2,140,237
Discount Rate (Assumed)15%
Discounted Cash Flows         (2,782,566)         1,420,327         1,273,646         1,141,888         1,023,564             917,333      821,981      736,415      659,646      590,787      529,034
NPV $        6,332,054
IRR40%

Exhibit 4: DCF Valuation of the Excavation Opportunity (Best Case)

DCF Valuation of the Excavation Opportunity (Best Case)
 20122013201420152016201720182019202020212022
 012345678910
Initial Investment            2,782,566
Revenues         5,250,000         5,378,625         5,510,401         5,645,406         5,783,719   5,925,420   6,070,592   6,219,322   6,371,695   6,527,802
Cost Savings:
Transportation Costs Savings             111,614             111,614             111,614             111,614             111,614      111,614      111,614      111,614      111,614      111,614
Subcontractor’s Costs Savings             700,000             700,000             700,000             700,000             700,000      700,000      700,000      700,000      700,000      700,000
Additional Expenses:
Operators’ Salaries             201,600             201,600             201,600             201,600             201,600      201,600      201,600      201,600      201,600      201,600
Site Supervisors’ Salaries             540,000             540,000             540,000             540,000             540,000      540,000      540,000      540,000      540,000      540,000
Administrative Assistants Salaries               35,000               35,000               35,000               35,000               35,000         35,000         35,000         35,000         35,000         35,000
Depreciation Expense             278,257             278,257             278,257             278,257             278,257      278,257      278,257      278,257      278,257      278,257
Machinery and Equipment Expenses             612,500             612,500             612,500             612,500             612,500      612,500      612,500      612,500      612,500      612,500
Operating Profit         4,394,258         4,522,883         4,654,659         4,789,664         4,927,976   5,069,677   5,214,850   5,363,580   5,515,953   5,672,060
NOPAT         3,735,119         3,844,450         3,956,460         4,071,214         4,188,780   4,309,226   4,432,623   4,559,043   4,688,560   4,821,251
Add: Depreciation Expense             278,257             278,257             278,257             278,257             278,257      278,257      278,257      278,257      278,257      278,257
Net Cash Flows         (2,782,566)         4,013,376         4,122,707         4,234,717         4,349,471         4,467,037   4,587,482   4,710,879   4,837,299   4,966,817   5,099,507
Discount Rate (Assumed)15%
Discounted Cash Flows         (2,782,566)         3,489,892         3,117,359         2,784,395         2,486,824         2,220,907   1,983,295   1,770,994   1,581,322   1,411,879   1,260,520
NPV $      19,324,821
IRR115%

Exhibit 5: DCF Valuation of the Excavation Opportunity (Average Case)

DCF Valuation of the Excavation Opportunity (Average Case)
 20122013201420152016201720182019202020212022
 012345678910
Initial Investment            2,782,566
Revenues         3,850,000         3,944,325         4,040,961         4,139,965         4,241,394   4,345,308   4,451,768   4,560,836   4,672,577   4,787,055
Cost Savings:
Transportation Costs Savings             111,614             111,614             111,614             111,614             111,614      111,614      111,614      111,614      111,614      111,614
Subcontractor’s Costs Savings             700,000             700,000             700,000             700,000             700,000      700,000      700,000      700,000      700,000      700,000
Additional Expenses:
Operators’ Salaries             201,600             201,600             201,600             201,600             201,600      201,600      201,600      201,600      201,600      201,600
Site Supervisors’ Salaries             540,000             540,000             540,000             540,000             540,000      540,000      540,000      540,000      540,000      540,000
Administrative Assistants Salaries               35,000               35,000               35,000               35,000               35,000         35,000         35,000         35,000         35,000         35,000
Depreciation Expense             278,257             278,257             278,257             278,257             278,257      278,257      278,257      278,257      278,257      278,257
Machinery and Equipment Expenses             612,500             612,500             612,500             612,500             612,500      612,500      612,500      612,500      612,500      612,500
Operating Profit         2,994,258         3,088,583         3,185,219         3,284,222         3,385,651   3,489,566   3,596,026   3,705,094   3,816,834   3,931,313
NOPAT         2,545,119         2,625,295         2,707,436         2,791,589         2,877,804   2,966,131   3,056,622   3,149,330   3,244,309   3,341,616
Add: Depreciation Expense             278,257             278,257             278,257             278,257             278,257      278,257      278,257      278,257      278,257      278,257
Net Cash Flows         (2,782,566)         2,823,376         2,903,552         2,985,693         3,069,846         3,156,060   3,244,387   3,334,878   3,427,586   3,522,566   3,619,872
Discount Rate (Assumed)15%
Discounted Cash Flows         (2,782,566)         2,455,109         2,195,502         1,963,141         1,755,194         1,569,120   1,402,638   1,253,704   1,120,484   1,001,333      894,777
NPV $      12,828,438
IRR78%

Exhibit 6: Data Sorting

Case Data
No. of Contracts Worst Case                          7
No. of Contracts Best Case                       15
No. of Contracts Average Case                       11
Average Revenue per contract             350,000
Total Revenue Worst Case         2,450,000
Total Revenue Best Case         5,250,000
Total Revenue Average Case         3,850,000
Duration (weeks)/contract                       16
Total Duration                     112
New Machinery and Equipment Required         2,782,566
Machinery and Equipment Expenses             612,500
No. of Machines(Trucks)                       14
No. of Equipment                       10
Estimated Life of Machinery and Equipment                       10
Depreciation Expense             278,257
Employees:
No. of Skilled Operators/contract                          4
Total No. of skilled Operators                       28
Rate Per Hour (Total)                       30
Hours worked per day                       10
Total Cost Per Day                     300
Days worked in a week                          6
Total Salaries of skilled operator             201,600
Salary of Supervisor (annual)               90,000
No. of site supervisors required                          6
Total Salaries to site supervisor             540,000
salary of Administrative Assistant (Annual)               35,000
Other Benefits(Cost Savings):
Transportation Costs Savings10%
Topsoil Sales         1,116,144
Transportation Costs Savings             111,614
Subcontractor’s Costs Savings             700,000

Exhibit 7: Porter’s Five Forces Model

Barriers to new entranceHigh·         High industry growth

·         Small requirement of initial capital investment

Threat of substitute productsLow·         Specialization in all levels of site preparation services are difficult to be substitute
Rivalry among competitorsHigh·         Higher presence of number of competitors in the industry which increases the level of threat from competitors.
Bargaining power of supplierLow·         The material used in the site preparation services are required only one time purchase during its whole project duration
Bargaining power of buyerHigh·         The multiple number of service providers in the market have increases the bargaining power of customers

Exhibit 8: Decision Matrix

Options or Decision CriteriaOption 1: Expand Business to Excavating Market

 

Option 2: Expand Business to Other Site Preparation Services

 

Option 3: Expand Business to Topsoil Business Segment

 

Must improve the liquidity position of the company.

 

Yes- With potential amount of cash flows.May be- With potential amount of cash flows.May be- With potential amount of cash flows.
Must increase the business scale of PH.

 

Yes- with expansion towards excavating services.Yes- with expansion towards other site preparation services.Yes- with expansion in topsoil business.
Must improve the overall financial performance of the company.

 

Yes- with improvised financial ratios.May be- with improvised financial ratios.Yes- with improvised financial ratios and high growth potential.
Must reduce the overall operational and sub contractual costs of the company.

 

Yes- with reduction in transportation subcontractor’s and topsoil manufacturing costs.May be- with synergies in site preparation services.No- as it would require increased marketing costs.

 

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