Financial Management - Solved example

A proposal to extend the ABC Gas Company Ltd’s gas distribution network to the NOIDA industrial cluster, about 40 km east of Delhi, at distance of about 20 kms from the ABC’s existing transmission line, is under the consideration of its CEO, Prerna Goyal. The NOIDA industrial cluster is dominated by the textiles industry including texturising, weaving, spinning and yarn units with over 2,500 small and medium size units. The potential of gas consumption in these industries is mainly on account of captive power. Power constitutes 40 - 65 percent of the production cost in the key target sectors for gas supply. The units in the cluster have been considering reduction of power costs by moving away from the expensive grid supply to captive power generation. The total estimated potential of captive power presently is 45 MW which corresponds to 0.30 million standard cubic meters per day (MSCMD) of gas. The proposed project is essentially an extension of the distribution network in the existing Delhi distribution zone.
A market survey of potential customer to assess the gas demand potential in the region has identified over 40 customers with a combined gas demand of 0.25 MSCMD for captive power. Negotiation for gas supply has also been initiated with them. ABC Gas Ltd has received expression of interest for over 0.075 MSCMD. However, timing of gas supply is the key since alternative fuel option such as solid and liquid fuels and wind energy are available. The expression of interest would fall through if gas is not supplied by mid 2008.
Amit Kumar, an engineer consultant, is hired by Prerna Goyal to identify the most feasible and economical route for laying down the gas pipeline. A preliminary site survey is followed by reconnaissance survey by Amit. After conducting Quantified Risk Assessment and evaluating several pipeline options, the consultant has proposed a 12 inch, 150 class low pressure (19 bar) pipeline for a total length of 30 kms from the ABC’s transmission