Business Case Development

SWEMA Spring Meeting June 6, 2005

Wayne Callender

Business Case Development

SWEMA Spring Meeting June 6, 2005

Wayne Callender

The ProjectThe Project

• Mass replacement of a portion of the existing meter population with radio frequency meters

• Used in a walk/drive-by capacity

• Main Driver - Increased productivity for meter readers to allow reduced staffing through attrition

Key PointsKey Points

• Timing, Timing, Timing

• Involve Multiple Areas

• Be Conservative

• Make Sure People Read It

• It Helps to Be Lucky

Business Case FlowBusiness Case Flow

• Hard $$

• Soft $$– Get input from multiple areas

• Weigh them out SEPERATELY and then make decision

• Document Everything

• Don’ Forget to Account for Risk

Financial AnalysisFinancial Analysis

• Cash is King

• Only consider Cash Flows in the future that are different between various scenarios

• Make sure that the time frames are the same between scenarios

• Is it Fixed or Variable?

Financial ToolsFinancial Tools

• Net Present Value (NPV)– Calculates the value of the investment (sum of all cash

flows) in today’s dollars adjusted for the time value of money at a utility’s weighted average cost of capital (WACC). Higher the NPV the more valuable a project scenario, and in general, accept all investment decisions with an NPV greater than zero.

• Internal Rate of Return (IRR)– Calculates the rate that discounts all of the cash flows of

an investment to exactly zero (i.e., the discount rate where the NPV is zero). The IRR is the expected rate of return on an investment.

Financial ToolsFinancial Tools

• Payback– The time period in years required to break even on the

initial investment on a non-discounted after-tax basis.

– Payback period is probably the most used and misused financial measurement in the utility industry. Payback does not take into account the time value of money nor does it reflect the economic value of a project.

– Payback period can be easily manipulated through financing arrangements. For example, an AMR project with a seven year payback on a purchase basis would have an immediate payback (less than six months) if the project were financed.

Other Financial ConsiderationsOther Financial Considerations

• Arrow Diagrams

• If it’s Sunk it’s Sunk

• Make sure you Consider Opportunity Costs

• Don’t Forget about Depreciation

0 1 2 3 4 5 n

OutflowInitial

Investment

Inflows

The Soft StuffThe Soft Stuff

• Customer Satisfaction– Internal and External

• Employee Development & Satisfaction

• Safety

• Image/Brand

• Environment

• Community

• Brainstorm with Other Areas of the Company

Other ConsiderationsOther Considerations

• You don’t have to do it alone

• Be Careful What You Wish For…

• Be ready to act

• Get the “Dog and Pony” show ready

One More ThingOne More Thing

QuestionsQuestions

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