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Medium Investment Decision ROI Analysis

Deepwater Inc

#Energy #Manufacturing
ProHub Comment

This case tests the candidate's ability to analyze an unfamiliar manufacturing process, build a comparative framework (with and without filter scenarios), and conduct financial ROI analysis. Strong candidates will systematically ask clarifying questions about product flows, competitive dynamics, and cost drivers before building quantitative models, while also considering strategic risks such as commodity price volatility and regulatory changes.

Estimated Time 15 minutes
Difficulty Medium
Source Chicago Booth
50 / 100
Our client, Deepwater, is an oil refinery firm looking at an investment in a filtering unit to transform residual oil into useful feedstock to produce gasoline (show Exhibit 1). The major input is crude oil which gets refined to gasoline. Deepwater would like your help in determining whether or not they should invest in the filtering unit.

Clarifying Information

  1. The usable output is gasoline.
  2. Oil 6 can be converted to feedstock and then gasoline.
  3. Residual is a waste product unless the filter is purchased. Residuals are leftovers (heavy oils).
  4. Gasoline is sold to a competitive market and the company has no influence on the price of gasoline.
  5. There is enough demand for gasoline.
  6. Fuel can be used to fire the different units. If fuel is not available, residual is used.
  7. The filter transforms residual into useful cracker feedstock.
  8. Many of Deepwater’s competitors have invested in this kind of filter unit.
  9. There are no significant environmental concerns with respect to the filter.
  10. There is no outside market for Oil 6 or feedstock.
  11. The client estimates an investment cost of $40M and a 20 year useful life of the filter (assume straight line depreciation).
  12. The client also estimates annual operating costs of $4M per year for the filter.
  13. With the filter we can make an additional 5,000 barrels/day at a contribution margin of $4/barrel.
  14. The plant operates 350 days per year.