Reference no: EM133020918
Question - The South African government has had energy problem over the past decade. This has been caused by a rapid increase in social development programmes that has not been matched by an increase in energy sources. In particular, the town of Springbok in the Northern Cape Province has seen a rapid increase in social development programmes in recent years. This has resulted in the shortage of gas and electricity supply in the town. However, during the past two years, gas reserves were discovered in the Kalahari Desert very close to the town of Springbok. A local company that is located in Springbok town has been exploiting (mining) the gas reserves and supplying the gas to the town through a pipeline. The gas reserves are believed to have an indefinite lifespan. Several households in the town of Springbok are now connected to the gas mains and are already using this gas as an energy source.
The local municipality has established a new residential settlement in Springbok during the past year. Over the past six months about 8000 new residential units were constructed under the Reconstruction and Development Programme (RDP). These houses have already been allocated to new owners. The residential units have not yet been connected to the Gas mains.
The company responsible for gas supplies is now trying to establish whether or not to provide gas supplies to these units.
The following information is available:
New customer charge for connection and installing a gas meter R300
Cost of Gas supplies to the company 8 cents/metered unit
Gas wastage 20%
Company cost of capital 17% per year
Quarterly Charges
Standing charge per quarter R15
Gas consumption charge R500/1000 metered units
Average domestic monthly gas consumption 120 metered units/month
A survey was conducted recently in the new residential area. There was a 50% response rate. 90% of the respondents indicated their desire to be connected to the gas supply.
Required - Determine the maximum capital project cost that the company should be willing to spend to provide gas to the residents of the new settlement.
Hint: calculate the net income per customer and the NPV per customer first, then determine the number of customers. Use these figures to calculate the maximum capital project cost.