BUSINESS CASE ANALYSIS – SECURE EBIT

Most companies have to prioritise which potential projects they will choose, in respect of the business and profit each project’s outcome can generate. They also have to consider what risks the projects can pose for the company’s shares.

How do you choose the correct projects?

You set out a business case for each project and calculate the project’s key figures – return on investment (IRR), payback period and net present value (NPV), on the basis of investments, cost prices, operating costs and earnings.

This means that you can compare the project’s key figures and select the correct ones – IF at the same time you have a financial risk assessment of the projects! Therefore, you carry out a three-point estimation of the effect of the souroundings and all main data, so that you can calculate the uncertainty of return on investment, payback period and net present value.

The management assesses which business cases can both support the company’s strategy and provide the desired return under an agreed maximum level of risks.

Benefits of the method

  • The company gains insight into:
    • The project’s assumptions, opportunities and risks.
    • What degree of uncertainty lies in the project’s surroundings (often 75–90%!).
    • What degree of uncertainty lies in the project (the technical solutions).
  • In addition, the project group gains a high degree of ownership of the plan, since they participate in the estimations.

Challenges with the method

  • It requires good preparation of the participants and project information about the basic situation.
  • The company must have some maturity in its approach to budgeting and accept improvements.
  • Colleagues must accept that other professional groups shall participate in the estimations within their professional fields.

HKS-Consult Cases

  • Estimation of a major HW/SW controller platform, Vestas Wind Systems.
  • Estimation of a new and complex HW/SW controller system, Mita-Teknik.
  • Direct risk assessment of a business case for a major offshore wind farm in the UK, Vattenfall.
  • Direct risk assessment of a business case for a minor offshore wind farm in the USA, German client.
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Business Case Analyse of an Offshore Wind Farm

Vattenfall wanted an external analysis of a business case for a major offshore wind farm. HKS-Consult set out business case scenarios with different wind farm setups. Image: DongEnergy.

HKS-Consult used a three-point estimation of energy production, electricity prices, investments and operating costs. These were entered into an Excel business case model.

The model calculated the project return on investment (IRR), net present value (NPV) and payback period. The method provided major benefits, since Vattenfall could subsequently see the Top 10 uncertainties of the project’s key figures for comparable little effort.

In addition, the project group gains a high degree of ownership of the plan, since the group participates in the estimations.

Order a calculation example of Kriegers Flak offshore wind farm, which HKS-Consult presented at the Wind Power Monthly ‘Offshore Wind Farm Construction Risk Management’ conference in Hamburg.

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Training in the method.

Simple Business Case Calculations

You can relatively easily, make the first estimation of the business case’s key figures. This is done by carrying out a simple three-point estimation of: Investments in buildings and equipment, ongoing costs, operating costs, earnings, etc.

A smaller group estimates the figures, and the numbers are entered into a simple spreadsheet.

You then select the Top 5 elements that contribute with the greatest uncertainty to the business case. Next, you subdivide the Top 5 elements into 2–3 sub-elements and the group carries out an estimation of these.

This process is repeated successively (The Successive Principle) 2–5 times until the group has no more information.

Thus, you acquire an uncertainty assessment of the key figures. Download a simple spreadsheet and get started immediately.

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