1. Case Study: RCI and Southeastern
Jianzhong Zhang

2. Situation
RCI, a large company, takes calculated risks in projects that could produce energy.
Negotiated a contract to build and operate a resource recovery facility for Westborough county.
Construction will take a year from 1992 and cost $50 million.
County will pay 5 equal installments of $10million when plant is 20, 40, 60, 80, and 100% complete. $10million will be held if plant didn’t work.
Produce stem with an annual energy equivalent of 100,000 barrels of oil. Two possible customers: Acme Company, Southeastern electric company.
Acme purchase steam from Nov. to April at a 20% discount form the price of Jan, 1st of each year, starting from Jan, 1st 1993 or 1994
Southeastern just buy steam for 1993, but need build a generating facility, which will take one year and cost $1 million
Ignore the effects of taxes and time value of money

3. Decision for RCI
Price range $30 to $50, current $35 per barrel, uncertainty
Decide which steam will be sold to
Negotiate with Southeastern to get max benefit
Best: high price to sell to southeastern and no installments fee
Give up
Doesn’t’ work
-$10millon
0.3
build
Sell to Acme
100,000*0.5*oil price*80%
0.7
100,000*price -installments fee
Southeastern

4. Decision for Southeastern
Price from $30 to $50
Negotiate with RCI about price of steam and installment fee
Give up
Didn’t work
- Fee to build the facility
0.6
build
work
Benefit from selling electric – 100,000* price – fee to build
0.4