Financial Target

Currently there are several significant players in national biofuel market, who have all invested millions of pounds. In order to create and analyse our own baseline investment we will need to assess the current performance of the market leaders. The table below shows the larger scale commercial biofuel plants in the UK, indicating both operational and (known) planned plants [1].

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The market launch for our project will be in 2017, when we will begin Stage 1. Stage 2 will begin 2 years later with our own refinery. The first stage of the endeavour will cost £15 million, which is used to build the infrastructure, dispensaries and purchase vehicles; while the second will cost £90 million, which is focused on the construction of our own refinery.

 

In the first stage because Tesco owns 35% share of Greenergy Fuels Ltd [2], we will use Greenergy financial performance as the benchmark in biofuel business model financially. It’s reported in Greenergy Annual Report 2014 [3], that it gained £18.4 million operating profit. We calculate that the alliance will only be able to produce 70% of total revenue with the profit proportion 60:40, of Tesco and the supplier respectively. So by using an interest rate of 5%, after 1 year operation which is in 2018, Tesco will get £18.4 million leading to a £9.4 million profit.

 

£18.4 million x (1.05)^4 x 70% x 60%=£9.4 million

 

We will still use this benchmark when using our own refinery, even though it is not ideal, due to the use of a similar technology, although at this point all of the revenue will be attributable to us.

 

Greenergy built Immingham plant in 2007 with £50 million investment. Using the same figure with estimated 5% interest rate annually, after 2019 Tesco will spend £90 million on our refinery and its operation system.

 

 

 

 

 

 

 

 

 

In order to justify whether the project would be beneficial we have analysed the first 8 years of production, and their associated net present values. This includes the first 2 years in which we would be producing at Greenergy’s refineries and then in our own facility. For the net present value we used 2017 as our reference year.

 

                  NPV=-15 + 7.2 -74.2 + 14.9 + 16.4 +18.7 + 19.5 + 20.9=8.4=£8,400,000

 

The positive result of £8.4 million means that we believe that the project is worth doing, especially when one considers that there will be no significant cost in the foreseeable future.

 

 

REFERENCE:

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/266090/ecofys-uk-biofuel-industry-overview-v1.5.pdf

[2] http://www.fasttrack.co.uk/fasttrack/leagues/dbtop100Details.asp?siteid=4&compid=1735&yr=2014

[3] http://www.greenergy.com/downloads/2014_AR-spread.pdf